On Jan.13, the US Commodity Futures Trading Commission (CFTC) proposed hard position limits on the commodity futures, options and swaps positions of speculators, saying it aimed to reduce excessive speculation and prevent market manipulation.

In the IEA's monthly report on the oil market, the body that advises industrialized governments on energy policy focussed on market concerns about the impact the proposals could have on small investors and the possibility that position limits may drive some participants to other markets.

Market participants have protested that the CFTC has provided no evidence nor justification that the limits are necessary to prevent the risks it has identified.

The IEA pointed out the concern raised by market players that classifying long-only index positions as speculative would restrict small investor access to commodity price exposure via index funds. Index tracking funds are a simple, easy way for individuals to access commodity markets.

Market participants are also concerned that position limits that are not applied universally will create regulatory arbitrage opportunities.

"Imposing limits on derivatives positions that exchange-traded funds can hold will lead to the creation of physical-based ETFs that are not subject to position limits, which would eventually have the potential to distort prices," the IEA said in summarizing the fears.

Finally, it cited the argument that imposing position limits on individual classes as well as across trading venues could inefficiently constrain liquidity and so increase the likelihood of large price fluctuations.

The latest report fleshed out the arguments behind market concerns that the IEA outlined in an earlier report.

The IEA has already pointed to concerns that the proposed reforms will increase trading costs and volatility. Producers and end-users will have a smaller pool of counterparties to hedge their price risk with, thereby creating more volatility, it is argued.