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US regulators on Tuesday charged oil traders with manipulation of the price
of oil in 2008 during a period when the US benchmark rose over $147 a barrel.
Separately, the speculator premium on a barrel of crude may be as much as 40%.
The Commodity Futures Trading Commission (CFTC) accused the traders of making more than $50m in early 2008 from a fraudulent scheme and the
agency is seeking triple damages and disgorgement of gains, which could amount
to up to $200m.
As alleged in the CFTC complaint, the defendants - - Parnon Energy
Inc. (Parnon) of California, Arcadia Petroleum Ltd. (Arcadia Petroleum) of the
United Kingdom, Arcadia Energy (Suisse) SA (Arcadia Suisse) of Switzerland,
James T. Dyer of Australia and Nicholas J. Wildgoose of California - - traded
futures and other contracts that were priced off the price of the US
benchmark West Texas Intermediate light sweet crude oil (WTI). WTI is delivered
to commercial users at Cushing, Oklahoma, a major crude oil delivery point. The
price of WTI is a benchmark for a third of crude oil production around the world, and the
supply of WTI at Cushing is an important driver of WTI price.
Early in 2008, supplies in Cushing were at their lowest level since 2004, at
about 15m barrels, making them sensitive to signs of a shortage.
The CFTC says the defendants purchased large
quantities of physical WTI crude oil during the
relevant period, even though they did not have a
commercial need for crude oil. They purchased the
oil pursuant to their scheme to dominate and control
the already tight supply at Cushing to manipulate
the price of WTI upward and to profit from the
corresponding increase in value of their WTI futures
and options contracts (WTI Derivatives) on NYMEX
(New York Mercantile Exchange) and Intercontinental Exchange (ICE).
Next, once WTI
reached artificially high prices and they had taken
profits from their long WTI Derivative position,
defendants allegedly engaged in additional trading
activity - - selling more WTI Derivatives short at the
artificially high prices. Finally, defendants
allegedly strategically sold off their physical
holdings of WTI, mostly all on one day, to drive the
WTI price back down and to profit from their short
WTI Derivatives position. Pursuant to this
manipulative cycle, driving the WTI price up and
then back down, which they conducted in January and
March 2008, and attempted in April 2008, defendants
realized profits from their WTI Derivatives trading
that exceeded $50m, according to the
Surge in speculators since 2000
The CFTC reported in early May that non-commercial/speculator purchasers of
oil futures were at 68% in the preceding week compared to 32% of contracts for
actual users of oil.
A policy paper in 2009 by Rice University’s Baker Institute for
Public Policy shows a clear increase in the size and
influence of noncommercial traders, or “speculators,” in the
oil futures market since regulations were eased by the
Commodities Futures Modernization Act of 2000. The authors
now constitute about 50% of those holding outstanding
positions in the US oil futures market, compared with only
about 20% prior to 2002. The report also finds that
the correlation between oil and the dollar has strengthened
significantly over the past several years.
Using CFTC data, the authors state that the previous claims by the
commission that speculation wasn’t influencing oil futures
markets were based on inappropriate analysis. The authors
present new evidence that speculative trading is playing an
increasingly important role in the oil market.
They note that while the question of what has produced
sharp swings in oil prices since 2005 is a complex one that
requires further and deeper study, there are “inescapable
facts” that need to be part of the debate about regulating
the activities of institutions betting on movements in oil
price purely for financial gain. Specifically, speculators,
which the CFTC designates as any reportable trader who is
not using futures contracts to hedge, have increased their
footprint in the marketplace dramatically since the late
Hedgers are typically producers and consumers of the
physical commodity who use futures markets to offset price
risk. By contrast, speculators seek profits by taking market
positions to gain from changes in the commodity price, but
are not involved in the physical receipt/delivery of the
While there were short windows of time before 2001 when
the oil price and value of the dollar were correlated more
strongly, a dramatic sustained period of high correlation
emerged during the 2000s, according to the Baker Institute
study. Given this new strong correlation, the authors note,
the threat to the US economic health and national security
is that the dollar risks getting caught in a vicious cycle
where continually rising oil prices feed the US trade
deficit, leading to increased US indebtedness and thereby
an even weaker dollar, which further drives oil prices
The authors conclude that new policies are needed. When
oil prices started rising in 2007-08 from $65 per barrel to
$125, governments around the world, including the United
States, engaged in building strategic stockpiles. This
policy signaled to oil-markets participants and the
Organization of the Petroleum Exporting Countries that
governments would not use strategic petroleum stocks to ease
prices under any circumstances except major wartime supply
shortfalls. This allowed speculators to confidently expand
their exposure in oil market futures exchanges without fear
of repercussions and revenue losses from a surprise release
of US or International Energy Agency strategic oil stocks.
“We need to re-evaluate our policies for how we utilize
strategic oil stocks in light of the oil/dollar linkages,”
said Jaffe. “Clearly, our government needs to fashion a
CFTC commissioner Bart Chilton said on May 5: "There are now more speculative positions in
commodity markets than ever before. The number of
futures equivalent contracts held by these types of
speculators increased 64% in energy contracts
between June of 2008 and January of 2011. In metals
and agricultural contracts, those speculative
positions increased roughly 20% or more."
Exxon Mobil CEO Rex Tillerson said in testimony before the Senate Finance
Committee two weeks ago that current fundamentals and production costs would
dictate oil in the range of $60 to $70 a barrel - - $43 below this year's WTI
high of $113 a barrel reached in late April and early May.
At the current price of $99 a barrel, that would put the speculator premium
at more that 40%.
Tillerson refused to comment on the role of speculators, saying only that the
price of oil "will be wherever it will be."
Goldman Sachs' estimates in March
indicated that the total speculative premium in US crude oil was between $21.40
and $26.75 a barrel, or about a fifth of the price.
Kevin G. Hall and Robert A.
Rankin of McClatchy Newspapers
recently wrote: "There is no shortage of oil stocks
by historical standards. There's an estimated 3m to 4m barrels per
day (bpd) of excess oil production capacity in the world today. That's much more
than when supplies were tight in 2008.
US oil production, too, continues to grow. It rose from 4.95m bpd in
2008 to 5.36m bpd in 2009, followed by 5.5m bpd last year - even
with the BP disaster in the Gulf of Mexico. The Energy Information
Administration forecasts US production to hold at that level this year and
rise again next year, to 5.54m bpd.
US crude oil stocks on April 29, the date oil peaked this year above $113 a
barrel, stood at 1.768 billion barrels, according to the EIA. That's about
700,000 barrels more than in July 2008, when oil prices hit all-time highs.
And that's plenty to meet US needs, because consumption isn't growing.
The US consumed 20.68m barrels per day in 2007. Then came the financial
crisis, and consumption dipped to 19.5m bpd in 2008. Last year the number
was 19.5m bpd. This year's projection is 19.28m bpd.
So if supplies are plentiful and consumer demand isn't rising, why are prices?"
CFTC commissioner Chilton
recently said that there is now proof that "one trader
held over 40% of the silver market."
As to why there isn't greater
urgency to address the issue of rising speculation, Commissioner Chilton
commented on May 5: "Recently, a bill was
introduced in the House of Representatives to delay the new (financial industry) rules for 18 months - - after the next presidential election, which I
don't think is a coincidence. Washington can be forgetful, but this seems like
advantageous amnesia. Remember, the crisis was avoidable and another one will be
avoidable if we get in gear and get this law implemented.
of the reason for the reticence among some could
have something to do with money. It was just
announced late last month that the financial
industry spent more money lobbying in the first
quarter of this year than it did in the first
quarter of 2010—when the bill was being debated on
the Hill. There are 10 financial service sector
lobbyists for each Member of Congress. Those forces
and that money are now also directed at regulators.
It tells you why there’s a swarm of lobbyists and
others in the lobby of our building every morning,
replaced by a different swarm by noon and another in
the afternoon. I’ve said often that we want to hear
from people as we implement the new law, and I do,
for sure. However, I don’t have much patience for
those who come in and tell us how to exclude them or
delay the rules."