Bloomberg reports that the Commodity Futures Trading Commission, which has opened an investigation into whether market manipulation may be influencing oil prices, is taking a hard look at physical delivery and storage.
A particular focus is the role of Cushing in the trading of West Texas Intermediate Crude, one of the two most important contracts in oil pricing. As we noted in an earlier post, citing an article by John Dizard in the Financial Times:
You don’t have to buy the evil-specs-caused-all-this argument to believe there are problems with the way parts of the commodities markets work. As Mr [Eugen] Weinberg [at Commerzbank] points out: “The West Texas Intermediate oil contract, based on delivery in Cushing, Oklahoma, is good for 300,000-400,000 barrels per day. The storage capacity in Cushing is about 20.5m barrels. The trading volume on which that is based is between 500m and 600m barrels per day. If you are going to manipulate the price, you would think about doing that in Cushing.”
Reader mxq also pointed out a revealing quote from this morning’s Wall Street Journal story on the CFTC investigation from a Paul Pantano, a Washington lawyer who advises energy companies:
Commercial parties and speculators are operating in a market where the rules about what is considered manipulative conduct versus legitimate trading activity are not very clear.
Now of course, this statement raises several interesting questions: first, that traders may have engaged in behavior that would be deemed manipulative in other markets, but the CFTC cannot call it such due to the difference in rules. The second, of course, is that traders knowingly exploited these ambiguities (litigation would enable one to get into e-mails to probe intent; I suspect that level of discovery is not a normal feature of a CFTC investigation. (I’ve been in the room when counsel has advised trading operations on what to say if the SEC were to come calling, so I’ve seen first-hand that ambiguities are exploited with intent).
Reader wprestong pointed out that NYMEX is increasing margins on oil futures as well as additional contracts. Not clear yet what impact this will have.
From Bloomberg:
The oil investigation is far enough along that the commission could announce it publicly without hindering its ability to gather information, he said. “I hope we have something more to say about this sooner rather than later,” [Commissioner Bart] Chilton said.
Chilton didn’t elaborate on the December incidents that drew the CFTC’s interest. The benchmark tanker rate from the Middle East to the U.S. Gulf Coast surged that month.
In terms of oil storage, regulators will likely focus on Cushing, Oklahoma, the delivery point for crude oil sold on the New York futures market, said Kyle Cooper, director of research at IAF Advisors in Houston. Stockpiles at Cushing amounted to 21.3 million barrels of oil as of last week, 6.8 percent of the nation’s total, according to the Energy Department.
“Cushing has always been a bone of contention because of the relatively small size and the influence it has on a market as big as crude oil,” Cooper said. “If you have a few players who have a significant influence over the market, then they have the ability to influence prices.”….
There had to have been something that “caught the attention” of the commission to launch the oil-trading investigation, said Michael Haigh, head of U.S commodities research at Societe Generale SA in New York and a former CFTC economist.
“However, they may be under pressure from Congress to look at this market, given the high prices,” Haigh said. “The CFTC doesn’t want to be perceived as being asleep.”
The CFTC also said yesterday it was taking steps to improve transparency in energy markets, including more monitoring of U.S. oil trading on Intercontinental’s ICE Futures Europe exchange in London.
“That’s definitely an issue, and it’s been a burr in the side of the CFTC for a long time,” said Walter Zimmermann, vice president at United Energy Inc. “You whack it on the Nymex and it pops up on the ICE.”…
“Obviously, more accountability, more transparency is a good thing, but all this stuff about checking delivery routes — I just don’t subscribe to this whole conspiracy thing,” said Guy Gleichmann, president of United Strategic Investors Group in Hollywood, Florida. “The speculative buying would not have come this far if they did not have a story. The supply-and-demand scenario is very tight.”
Nymex Chief Executive Officer James Newsome and his counterpart at ICE, Jeff Sprecher, said they don’t see data to indicate speculators are driving up oil prices. Sprecher said ICE has had a rapid influx of commercial users trading to hedge against fluctuations in prices.
Michael Greenberger, a former head of the CFTC’s Division of Trading and Markets, said the agency is likely to find that some investment banks, hedge funds and wealthy individuals manipulated futures prices. Traders may face prosecution if they reported false prices or made offsetting trades designed to manipulate the market, he said.
“There will be a lot of administrative and criminal litigation before the sun sets on this,” said Greenberger, who teaches law at the University of Maryland.
Greenberger said that in addition to the pressure caused by consumer furor over record motor-fuel prices, the CFTC may be trying to protect its regulatory turf from the Federal Trade Commission, which has new authority to investigate energy-market manipulation.
“I think everyone is going to be watching to see how serious the CFTC is about this,” Greenberger said. “Yesterday’s take was that this is very serious.”
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A trader’s view regarding storage, via Dan Dicker over at Thestreet.com ($):
“…in the world of energy trade, there is lack of fungibility that has always broken down thus: Electricity, non-storable — Natural gas, more storable — Crude oil, mostly storable
Although easiest of the three, oil storage has been historically inelastic, no matter the price… Over the last 4 years (and for most of my trading life) forward stocks have always hovered between 50 and 55 days — storage is expensive and limited, and just not efficacious.
This is why, at least in my view, that supply arguments are often overblown in oil pricing theory — supplies remain closely aligned to demand and rarely overrun — as OPEC members have time and again explained but are ignored. This is why President Bush can walk in to a meeting with Saudi ministers and be patted on the head like a silly schoolboy — “you don’t understand, Mr. President — we’ve got nowhere to SELL any more right now” and Bush will run home and talk about increasing domestic supply as if he hasn’t heard a thing”
so i-banks are taking taxpayers’ money via the Fed’s lending facilities, and using that money to rig the oil markets at the expense of taxpayers?
We are all Enron now.
and John Mauldin is selling the “tankers floating on the ocean loaded with oil” as a reason for tight supply….and Boone Pickens has moved out of oil….one wonders why…could it be that “peak oil” is a reality and not a myth…read the oildrum.com for an understanding of what peak oil means….it’s not what most think
Isn’t a CFTC focus on manipulation a ‘few bad apples’ approach? Other hand, even this might suffice if the market has become sufficiently fragile.