By Christopher Doering and Ayesha Rascoe

WASHINGTON (Reuters) - The Commodity Futures Trading Commission will consider "every option" to clampdown on excessive speculation in energy markets, the head of the agency said on Tuesday.

The CFTC, the regulator of U.S. futures markets, is reviewing how to exert its power to limit how many futures contracts can he held, so-called position limits, and also if some traders should be allowed to exceed those limits.

The agency held its first hearing on Tuesday to study proposed changes. Meetings also will be held on Wednesday and August 5.

"I believe we must seriously consider setting strict position limits in the energy markets," said CFTC Chairman Gary Gensler. "Every option must be on the table."

Officials from the IntercontinentalExchange Inc <ICE.N>, or ICE, and the Chicago Mercantile Exchange, the world's largest exchange, were among those testifying before the CFTC. They said, unless efforts to curb speculation are thoroughly vetted, the CFTC risks increasing volatility and distorting pricing functions.

"While well intentioned, these measures often fail to achieve their desired objectives or, worse yet, lead to unintended consequences ... that would otherwise be discovered in properly operating markets," said Jeffrey Sprecher, chief executive of ICE.

Gensler said several questions remain that the CFTC must still answer, including what the position limits should be; who should set them, the CFTC or the exchange; and if exemptions should be allowed for traders to manage purely financial risk, rather than accepting the delivery of the actual commodity.

Several commissioners warned the CFTC must be cautious and not push traders to less regulated offshore markets. But, at the same time, Commissioner Bart Chilton said the "unprecedented volatility" over the past year had increased the urgency for the CFTC to make changes. "Whatever manner the agency proceeds, 'going slow' is not an option," he said.

U.S. futures markets said fundamental supply-and-demand factors, not speculation, were responsible for the increased volatility.

Sprecher of ICE complained the position limits, which are currently set by competitor CME Group Inc <CME.O>, lack transparency. He said ICE supports having the CFTC take over that authority.

"We believe that CME Group is in the best position to impose and administer position limits and hedge exemptions regarding the energy commodities, and are therefore prepared to act in the near term, before the Commission or Congress," said Craig Donohue, CEO of CME.

He said the CME backed a hard limit regime, including single-month and all-month combined limits, to complement the existing measures that are in place.

Currently, exchanges impose limits on energy products in the last three days of trading before a contract's expiration to address manipulation and congestion. The exchanges have accountability levels that trigger additional oversight tools, if a position exceeds a certain size.

Gensler estimated 70 parties exceeded accountability levels on the four major energy contracts during the last year.

To protect against market manipulation, the CFTC sets limits on the amount of contracts each investor can hold in some agricultural commodities. But, for energy products such as oil, the limits are set by the futures exchanges.

The move to toughen up oversight marks a sharp turnaround for the CFTC, which has drawn criticism for its hands-off approach toward market regulation, especially last year, when commodities rocketed to record highs.

"We and our consumers cannot continue down the same path," said Sean Cota, testifying on behalf of the Petroleum Marketers Association of America. "It is time for a concerted effort toward meaningful reform to restore stability and confidence in these markets."

Ben Hirst, senior vice president and general counsel for Delta Air Lines Inc <DAL.N>, told the CFTC extreme volatility in oil prices "has made it impossible to undertake necessary corporate planning and has been devastating to our industry."

With a number of anti-speculation bills pending in Congress, the CFTC's actions have been praised by some lawmakers, especially Democrats.

Senator Bernie Sanders, who has called for the CFTC to use its authority to curb excessive speculation in energy markets, praised the CFTC for not waiting for Congress to act.

"But, I am here today to tell you that as important as these steps are, they will all be for naught, unless they are followed up by aggressive action on the part of the CFTC to prohibit excessive speculation in oil and gas trading."

(Additional reporting by Tom Doggett, Tim Gardner; Editing by Walter Bagley)