Oil traders slip past US rules via London loophole

Oil traders continue to squeeze past tighter US market rules via a loophole that allows them to bet for bigger stakes on certain fuel futures that are under British regulation, brokers and analysts said.

The opening in what has been called the London loophole, which US authorities tried to close in June 2008, allows the kind of high-risk plays that concern the Group of 8 leaders who have shone the political spotlight on oil price volatility.

Traders buying oil contracts in London played a part in the spike in oil prices to nearly $150 a barrel last year, critics have said.

Trading volumes have since jumped on gas oil futures not monitored by the US Commodity Futures Trading Commission (CFTC) on the InterContinental Exchange (ICE.N) (ICE) in London.

The 2008 voluntary agreement between the CFTC, ICE and the UK Financial Services Authority (FSA) implemented set position limits on oil contracts physically deliverable in the US on the same basis as on the New York Mercantile Exchange (NYMEX).

Contracts on ICE such as the gas oil contract, the main European future linked to diesel and heating oil prices, and Brent crude futures were not covered by the agreement. That paved the way to the high volumes this year which traders said was a symptom of investors fleeing U.S. jurisdiction.

"Some of the European proxies are just as good to trade as on NYMEX," Global Insight analyst Simon Wardell said. "You can substitute one for the other pretty easily. It's not a big issue."

Traded volumes on the gas oil futures contract on ICE surged by more than 20 percent in the first six months of 2009, from the first half of 2008.

The same contract does not trade on the NYMEX exchange, but oil traders said market participants were using it to bid up heating oil in the US which has a similar end use.