While Spain may want to take its time before it asks for a bailout a downgrade by S&P may force the issue. S&P lowered Spain’s credit rating two notch’s lower to one notch above junk putting it at BBB-.  This comes as Greek unemployment hits a record high 25.1% the downgrade from the somewhat discredited S&P may not be as devastating as an expected downgrade by Moody’s but may force Moody’s to act or force Spain to take a bailout to head off rising bowering costs. Still the Spanish bond market is recovering after the “shock” of the downgrade. The Euro dipped and flipped so the risk trade went off and back on.

Of Course what was a “shock” to oil traders was the magnitude of the distillate drawdown in last nights’ API. We knew that supply was tight in the Mid-west as farmers are deep into the harvest. But a drop of 6.2  million barrels. Well I guess that could be right. That should support the complex if the Energy Information Administration confirms those numbers. As far as gasoline we saw a negative build of 2.47 million barrels and crude up 1.65.

Yester day the issue of position limits was hot and heavy when I spoke at the IndexUniverse's Inside Commodities Conference Reuters News reported that “The top U.S. futures regulator said he would support appealing a court ruling last month that struck down his agency's attempt to place limits on speculation in commodity markets. Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, said on Wednesday that his agency drafted the original rule at the direction of U.S. Congress. The rule, which was to have taken effect this month, limited the number of contracts traders can hold in 28 commodities, including oil, coffee and gold.

Congress included position limits as part of the 2010 Dodd-Frank financial oversight law, but critics, including Wall Street banks and Republican lawmakers, said the law did not clearly order the CFTC to impose those limits. U.S. District Court Judge Robert Wilkins threw out the tough new rules last month, saying the CFTC needed to prove the curbs were necessary to rein in excessive speculation.  It was a major setback for regulators struggling to implement the sweeping reforms enacted after the 2007-2009 financial crises and the first for any CFTC rule in the agency's history.

"Congress mandated us to do this," Gensler told reporters at a derivatives conference on Wednesday. "I'm looking with my fellow commissioners and the lawyers at all of our options of appeal and potentially, you know, writing new rules and things like that." Gensler said it is up to the commission to decide whether to appeal the ruling, but that he would support such a move.

Yet Lawmakers question the CFTC. Some lawmakers dispute the CFTC's assessment that it was required by the Dodd-Frank act to propose position limits. Four Republican lawmakers told Gensler in a letter on Wednesday that the court's decision to overturn the rules raised serious questions about the agency's rule-writing process. "We are very concerned, in the wake of the financial crisis, that CFTC staff are using limited resources to pursue ideological and political goals," wrote House of Representatives Financial Services Committee Chairman Spencer Bachus, committee vice-chairman Jeb Hensarling, and Randy Neugebauer and Scott Garrett, who both lead financial services subcommittees.

The lawmakers asked Gensler to report on the number of staff labor hours dedicated to writing and litigating the position limits rule, plus the cost of that labor, any outside counsel expenses and projected costs should the CFTC appeal the ruling. CFTC staffers have recommended that the agency appeal the ruling and the agency's general counsel has circulated a memo asking the five commissioners to consider that option, a source has told Reuters. Democratic commissioner Bart Chilton has said the regulator should appeal. The CFTC passed its rule last year. Supporters say the limits could help crack down on excessive speculation they say drives up oil prices for consumers.

Traders at an annual commodities conference in Chicago on Wednesday were unhappy, but not surprised, by Gensler's support for a possible appeal. The judge's ruling was a victory for Wall Street firms that feared position limits would hamper their lucrative derivatives businesses. They said regulators had not proven that such limits would actually prevent disruptive price spikes.

"The judge made the right decision," said Phil Flynn, senior energy analyst for Price Futures Group, at IndexUniverse's Inside Commodities Conference. Position limits could inadvertently make markets more volatile, not less, because traders will move deals to overseas exchanges with looser regulations, reducing liquidity in U.S. markets, traders said."I pray to God that we will not see position limits with teeth," Dennis Gartman, publisher of the Gartman Letter, told the conference. Speaking of Gensler, he said: "This guy's gotta be stopped."

My Take is that the CFTC should regulate the market but not get involved in the market. They should not be picking winners and losers and I don’t think they should be setting limits. It is like when the referee gets too involved with the game and tries to decide the outcome. It can have dangerous unintended consequences.

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Phil Flynn

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