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Miami Herald: Speculators charged with manipulating oil market


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WASHINGTON -- A group of financial speculators made $50 million by manipulating the price of oil in 2008, the Commodity Futures Trading Commission charged Tuesday.

The high-profile case underscores how high prices for oil and gasoline increasingly are believed to result significantly from financial speculation rather than solely from conventional market forces of supply and demand.

In a filing with the U.S. District Court for the Southern District of New York, CFTC attorneys alleged that a group made up of oil speculators Parnon Energy Inc., Arcadia Petroleum Ltd. and Arcadia Energy (Suisse) S.A. unlawfully manipulated trading of oil on the New York Mercantile Exchange.

The civil charges are for alleged manipulation during the first four months of 2008, when crude oil was on its way up to the all-time high of $147 a barrel.

The CFTC complaint alleges that the three companies and two executives conspired - during a period of relatively tight oil supplies - to amass big quantities of oil for next-month physical delivery. They were dominating and controlling supply, even though they were not commercial users of oil.

Read more: http://www.miamiherald.com/2011/05/24/2233069/speculators-charged-with-manipulating.html#ixzz1NMwQsaY9

I am floored that charges have actually been brought...

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3 years ago? By the time justice even charges these guys they have made enough interest to pay any fines. Plus they made 50 million on a multi-trillion dollar industry. These guys are guppies in a pool full of sharks. Talk about window dressing.

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The problem is the commodities market is much larger than the United States. How can US Law cover speculators which can choose any number of international exchanges to manipulate? This is a problem larger than our ability to regulate and it's that way by design.

Typically commodities traders are not criminals because they risk their own money to make their profit. They service as a hedge by commodity holders looking to lay off risk. The problem here is the inelastic nature of the commodity, and the tight supply have taken the risk to zero so their is no downside for the investors. No matter what they pay for the good they are certain to get their money back because they can simple charge more for the product and the oil refineries and ultimately the consumers will pay more. So instead of a risky efficiency benefiting the producers and consumers, these commodities traders are actually an inefficient drag on the market.

50 million dollars? That's a joke, hundreds of Billions are involved in this.

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The documents allege that these traders in January 2008 held 66 percent of the 7 million barrels of oil they expected to be in storage at the end of February in Cushing, Okla., where benchmark West Texas Intermediate (WTI) crude is delivered.

The companies allegedly held this large physical position on the final day of trading in the futures market for February delivery - an unusual move since they had no commercial need for the oil.

What they don't say here is by how much these people affected prices. Even if it's true, small moverments are enough for these guys to make a killing.

The role of speculation is very exaggerated when it comes to oil prices. Notice, for example, that they had to hold the oil physically in order to pull this off.

Now take a look at More on oil and speculation from that time period, by Paul Krugman:

One of the things I find puzzling about the whole oil market discussion is how complicated people seem to make it. They get all wrapped up in stuff about forward markets, hedge funds, etc., and lose sight of the fundamental fact that there are only two things you can do with the world’s oil production: consume it, or store it.

and

Now it’s true that oil supply responds very little to price, and that empirical estimates of the short-run price elasticity of demand, like this one, suggest that it’s low — say -.06. But even so, the math of a sustained, large bubble quickly becomes daunting. Say the demand elasticity is -.06, and that you believe that the current price is 40% above the level at which end-use demand equals supply. Then you have to believe that 2 million barrels a day is disappearing into secret hoards somewhere — secret, because it’s not showing up in the OECD inventory data. That’s a lot of oil. And bear in mind that people have been claiming that there’s an oil bubble for years.

So my challenge to people who say there’s an oil bubble is this: let’s get physical. Tell me where you think the excess supply of crude is going.

For speculation to have had the long term effect that a lot of people are assuming (and which Congress is happily encouraging), there would have had to have been much more oil stored somewhere in secret, and there's just no evidence of that.

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Raise your hand if you have money in the stock market (your 401k counts if any part of it is in the stock market)

OK if you raised your hand, congratulations, you are a "speculator" (now the discussion on the size and scope of your speculator influence may be a whole different matter)

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Raise your hand if you have money in the stock market (your 401k counts if any part of it is in the stock market)

OK if you raised your hand, congratulations, you are a "speculator" (now the discussion on the size and scope of your speculator influence may be a whole different matter)

Speculation is legal, manipulation is not.

---------- Post added May-25th-2011 at 11:51 AM ----------

So basically they put an order in to take delivery of the oil they purchased and because they don't have a commercial need to do so they are considered manipulators?

No they are manipulators when they hold enough of the market to affect price and then in advance of the action purchase futures they will profit from.

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OK if you raised your hand, congratulations, you are a "speculator" (now the discussion on the size and scope of your speculator influence may be a whole different matter)

To be fair, these people aren't being charged with speculation. They're speculators that are being charged with attempting to use their clout to artificially manipulate the markets, kind of like the Hunt Brothers and silver.

They were charged by the Commodity Futures Trading Commission too, though one might argue that a 10 million dollar fine after making literally billions is not much of penalty or deterrent to future attempts by others.

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This really isn't news. This was know at the time all of this was going on. The only difference, that I can see is that in 2008, it was an election year and so nothing was made of this. Now, the same effects are impacting the current administration and so it's getting more attention from this Administration. Nothing will happen here because what is happening is not illegal. I think it's a damn shame that there is not more control but at the end of the day, nobody is breaking the Law, so far as I can tell.

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No they are manipulators when they hold enough of the market to affect price and then in advance of the action purchase futures they will profit from.

Unless the NYME doesn't have the ability to back up the futures contract, it shouldn't make a difference whether they take delivery or simply hold a futures contract for the oil, they are taking whatever amount of oil they buy off the market. Now if the NYME doesn't have the ability to back up all of the futures contracts, then I could see this plan working, but that would mean the real manipulator would be the NYME.

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Which affects price and they are positioned to take advantage of that effect. That is manipulation and is illegal.

No, I don't think you can get anybody on that. OJ, Pork, really anything that is bought or sold happens like this. If the President got up and said the U.S. is going to plan to open up leases in the Gulf or Drill for oil in ANWAR, all of this would go away. This is a controllable situation. We simply chose not to invoke controls because of various different political agendas. For every cause, there is an effect. That's not against the law.

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Which affects price and they are positioned to take advantage of that effect. That is manipulation and is illegal.

Every time you buy or sell it effects price. Would it still be manipulation if instead of taking delivery they just used that money to buy more futures contracts? Or instead of futures they simply put all their money into taking delivery? And if so wouldn't all of this be offset by the fact that they actually have to sell their inventory to make a profit which would neutralize their position in the first place?

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