Oil Prices Are Manipulated by Speculators

U.S. commodities regulators have brought a civil law suit against a small group of oil speculators who are believed to have manipulated oil markets in early 2008 and netted gains of $50 million.  Here we are talking about only 2 traders and 3 trading firms!

Specifically the culprits are:

• James T. Dyer, Australia
• Nicholas J. Wildgoose, United States
• Parnon Energy, United States
• Arcadia Petroleum, United Kingdom
• Arcadia Energy, Switzerland

These five entities are thought to have raised oil prices, and consequently, oil prices for every single global consumer.  These very few speculators raised oil prices above $100/barrel resulting in a cost to everyone else , likely in the billions of dollars.

Here’s how these (likely) bastards did it:

1. In January 2008 the speculators built up gigantic positions in oil futures contracts on markets in New York and London
2. At the same time they bought 4.6 million barrels of oil (!) at Cushing, Oklahoma.  For those who don’t know the supply and demand for oil at the Cushing oil depot helps to determine the very important benchmark price of oil known as West Texas Intermediate.  The 4.6 million barrels of oil was approximately 2/3 of the available excess supply at Cushing at the time.  It’s also important to note that they had no viable commercial reason for buying the oil.
3. Because their buying of so much of the oil at Cushing, the rest of the oil speculators in the market thought that oil supplies were unusually tight.  What happens when supplies are tight in the face of flat demand?  That’s right, prices rise.  Here they rose dramatically.
4. When the prices rose that drove up the value of the futures contracts that they had bought.
5. Then they started to sell their futures contracts in mid-January.
6. Then they waited several days and then using futures contracts again, they began to bet that oil prices would fall.  Why?
7. On January 25, 2008 they sold most of the oil that they had bought at the Cushing depot, flooding the oil markets with cheap oil.  Because supply was suddenly higher than everyone thought, prices fell.
8. So they made a lot of money on the fall in oil prices, too.

It’s important to note that this took the coordination of very few people with ill intent at very few organizations will equally ill intent.  Most importantly, what it really took was poor trading rules, and opaque commodities markets.  Here regulators are not able to truly see into the transactions taking place in the markets, therefore they don’t really know if true supply and true demand are driving prices, or whether it is just plain old market manipulation.

This operation also took a huge amount of capital.  To have bought 4.6 million barrels of oil when oil prices were approximately $100/barrel meant that the three firms involved had to have $460 million dollars to deploy.  In other words, you and I could not have engaged in this manipulation by combining our bank accounts.

Also, note that the speculators are thought to have made $50 million here, or 10.9% on their capital.  That may not sound like much, but they made it over the course of about one month.  If you were to annualize that return then the return would have been well over 130%!

Folks, this is an egregious manipulation of financial markets for the benefit of very few players.  This is inherently unfair.  It is these kinds of stories that destroy the trust of investors in the markets – which is ultimately the bedrock that the financial markets rest upon.  If buyer doesn’t trust seller, or seller doesn’t trust buyer, then no transaction takes place.

I have said for many years now, including on my blog, that oil prices are manipulated by speculators, not to mention all of the other commodities, too.  My knowledge comes from having been a nationally ranked oil analyst by Thomson-Reuters during my career as a research analyst.  See the following posts for more information:

“Crudeness” from 12 November, 2008

“Reining in the Commodities Speculators” from 8 July, 2009

“Commodities Trading Rules Are Flawed” from 7 March, 2011

But finally here today we have convincing proof of what I have been saying for years.  Unfortunately, it is difficult to imagine that today’s accused are the only ones out there manipulating prices.  No, instead, an intelligent, thoughtful person must assume that there are other, more sophisticated, more monied manipulators out there.  Despicable!

This is why I am a critic of capitalism, not because I hate capitalism, but because at the heart of our economic system is the proper functioning of markets.  Markets where buyer and seller alike are treated respectfully and have equal access to information.  Ugh!

Yours,

Jason