European Tribune - Community, Politics & Progress.

Oil Market Manipulation

by ChrisCook
Mon Jun 16th, 2008 at 10:02:38 AM EST

What follows is a long response to a writer I know who has a deep, long standing, well informed and occasionally controversial interest in the oil markets.

It's not called the "Brent Complex" for nothing! I often assume more familiarity than exists.
I am conscious that my own knowledge has not kept up with recent developments in the market and have been busy researching and trying to get my head around the current structure.
Early Days
By way of a history, the "Brent 15 Day" contract was a set of contract terms developed by Shell in the late 70's / early 80's which- unusually - allowed the resale of "Cargo -size" parcels of crude oil produced by their North Sea Brent crude oil field.
A market in these forward contracts rapidly developed, assisted by rampant tax "spinning" ie sale and repurchase of forward contracts successfully (albeit only temporarily!) aimed at exploiting tax loopholes.
This Shell 15 Day Brent contract essentially specifies a contract month within which - after a certain "expiry date" in the month before delivery - buyers may give 15 Days' notice of their intention to "lift" crude oil within a nominated 3 day delivery "window". Once buyers have specified this "window" pursuant to a Brent contract, then the contract becomes what is known as "Dated" and the cargo becomes "Wet".
The purchase and sale of Dated Brent cargoes is as close as one gets to buying "Spot" Brent crude oil on a market.
Enter IPE
In the late 1980's, the IPE tried twice to introduce standardised physically deliverable Brent Crude Oil futures contracts, and failed because of incompatibilities between the 1000 barrel contract size and the delivery size of 500,000 barrels, combined with excessive "operational tolerances" in deliveries (ie the seller could deliver 500,000 barrels plus or minus a 5% age delivery tolerance, recently reduced to 1%)
So the IPE introduced in the end a futures contract which was "cash settled" on the expiry date some six weeks before the relevant contract month. It was settled against an "Index" of the prices reported by market observers like Platts (in particular), Argus and others.
Platts are hugely important in the oil market and it is their "assessment" of the Dated Brent price against which 65% of global crude oil is priced. Platts have always had an interest in solving problems in the Brent market as they developed, and try fastidiously to be perceived as "neutral".
Through the late 1990's the decline in Brent Crude Oil production was already causing problems, because market players would often try and "squeeze" the market by buying up as many forward cargoes as they could, and then "squeezing" financial players/traders, who had speculatively sold 15 Day contracts in respect of oil they did not have.
Also during this period- which was my time at IPE - new trading tools developed to enable market players to "hedge" the price risk they had between the expiry of the IPE contract and the actual "Dated" delivery.
The major bust up I was involved in a few years after I left IPE related to manipulation of the IPE contract daily settlement price. This was "micro" (short term) manipulation, as distinct from major market medium term plays involving big trading positions, which I characterise as "macro" manipulation.
This "micro" manipulation created losses for the traders "on-exchange" which were more than offset by profits "off-exchange" on contracts or instruments that were priced against IPE contract settlement prices, ie a "sprat to catch a mackerel".
As you know, my allegations were rejected (albeit they were absolutely correct and well founded, and since confirmed) and I was professionally buried and discredited.
Developments Post 2001
Since then, the Brent field has continued its secular decline and not only have additional oil fields (Forties was introduced to the IPE contract spec during my time at IPE, and Oseberg since, to give rise to the "BFO" acronym) been brought in within the "Complex" but also the trading mechanism has developed in subtle but important ways.
This paper on BFO from Platts is excellent and pretty much definitive
Introducing BFO
also
BFO FAQ's
is a good description of the market structure as it has now evolved.
This
Clash of the Titans
was an interesting description of the struggle between BP and Shell in relation to the evolution of the contract. It is not clear to me exactly who, if either, actually "won".
Also an informative link in relation to the esoteric - but very important - "Contract for Difference" market which allows the price risk to be managed, and without which financial market players ("Wall Street Refiners") could not operate.
Brent CFD's
So we have seen some important developments in recent years to give rise to a BFO complex, and a plethora of trading in the ICEFutures cash settled "BFO contract" as it technically now is, and the re-jigged "BFO" market itself.
Brent/WTI
The physically deliverable WTI itself has become increasing irrelevant (as WTI itself - like Brent, declined) and during the last few years has essentially become an adjunct to Brent through a massive trading mechanism known as the Brent/WTI Arbitrage.
This article - ironically by Hess, in my experience one of the "usual suspects" on the market - is useful background on the situation some seven years ago
Brent/WTI Arbitrage 2001
and things have moved massively against NYMEX since then, as a large part of WTI trading migrated to ICEFutures in London, following the "London exemption" to CFTC speculative position limits (where I am reserving judgement).
This article last year is good
Clash of the Titans - Round Two
The BP/ Goldman complex
BP and Goldman are joined at the hip, both in governance terms - which is a matter of record (ie same Chairman, common Directors etc): and in economic terms both have made massive profits from energy trading - profits are how you reach the top in Goldman, and energy trading has always been Blankfein and Cohn's show.
Structurally BP have always been massively "short" of the BFO market, since they have always "hedged" their Forties and other production using the IPE/ICEFutures contracts and associated trading tools to do so.
Goldman,on the other hand has long had its massively successful GSCI and huge amounts of money have been invested in funds which are "invested" in Brent and WTI contracts and "rolled over" every month.
Goldman's trading arm J Aron has routinely "Date Raped" these positions as they roll over. See John Dizard, here.
Date rape
Goldman was also making routine use of the IPE settlement trading loophole I exposed, but that fact was buried.
But that IMHO is nothing to what has been going on between these two, in the last 10years.
Evolution of Manipulation - From Micro to Macro?
I believe that BP and Goldman's "matched" long/short Brent/BFO position has allowed them to act jointly as something of a fulcrum for manipulation. So that when one of them "bids up" the market - possibly losing money in doing so - the other will make matching profits, which it could -were it so minded - reimburse with "wash trades" (ie laundering) trades "off exchange".
Both parties would then benefit from the fact that this artificially induced volatility made them profits on their "off-exchange" dealings eg they could sell options at overpriced premiums because the volatility was artificially high. Also hedgers using OTC deals with one leg based on the IPE contracts would lose out because their hedging loss would be greater, or hedging profit less, than it should have been.
Both made lots of money in this way while the market was in oversupply and relatively stable.
In the early 2000's we saw the entry of hedge funds - speculative money - into the market, and BP/Goldman etc essentially lost control of short term market pricing (medium and long term pricing has always been about supply and demand). What happened is that they now make vast profits as counterparties for these hedge funds, utilising sharing of superior market knowledge, and the positions held by speculators.
I strongly suspect and I am purely speculating here as I haven't thought this through yet - that post 2004 BP attained a greater measure of control of the Brent /BFO pricing complex and continue to act in close (probably tacit) collusion with Goldman utilising the ICEFutures platform to manipulate markets.
Moreover, I think that they have been able to move on from "micro" short term manipulation to "Macro" medium term manipulation by using a combination of BP's Forties production, and Goldman's speculative GSCI investors as a base to keep the price artificially high.
How "sustainable" is this in the long term?
That ties in to the whole Peak Oil question, of course.
A good example was the 1985 Tin Crisis when the cartel of producer nations which kept the price artificially high eventually ran up against a tidal wave of new production which they could no longer afford to stockpile.
I don't see that happening in crude oil, frankly: sure there is lots of crude oil, but the low hanging fruit is long since gone, and I think that in terms of production levels, this is pretty much as good as it gets.
Demand destruction is another issue, and takes time to occur, but nowhere near as long as new production. If and when the market is in oversupply then the end of this manipulated "Bubble" will happen fast, as it did in the Tin Crisis, and quite likely take the Clearing Houses with it
I hope that all makes sense.
In terms of strategic interests of course the producers (Norway in particular, Russia and many Gulf producers) will be quite happy to see these high prices, and would see the billions made by intermediaries as a small price to pay.
The real losers are the consumers - first and foremost the US, and then China and Japan. The US and China have a common interest on sorting this out.
The US Congress and Senate are looking in the wrong place for culprits IMHO.
Irrespective of the value of position limits as a tool to limit manipulation (where I have my doubts) the embarrassing fact for NYMEX and the US is that the WTI contract is these days the tail, and the ICEFutures BFO contract the dog.

Note that I made no reference (for reasons I will not bore you with) to increasing demand from China etc.

This response was not, at the end of the day, about Peak Oil, and perhaps any comments in relation to that aspect might usefully be directed to another Diary?

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Oil Market Manipulation | 69 comments (69 topical, 0 editorial, 0 hidden)

Re: Oil Market Manipulation (4.00 / 4)

Mmmm, this is some very chewy stuff. Takes a long time to digest, also.

When you write, "The US Congress and Senate are looking in the wrong place for culprits IMHO," I have to confess that I'm not all certain just where the US Congress and Senate are looking. Clearly, they have grilled the CEO of the oil majors. But Michael Greenberger's testimony on June 3
http://commerce.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=1c9f4e27-376a -49c8-a244-25730c4bbbe8
directly implicated Goldman Sachs, Morgan Stanley and British Petroleum, and the hedge funds in the manipulating the oil futures markets through the CFTC exemption granted to the IPE in Atlanta.

So, I was hoping you would expound a bit further on exactly where you would direct the Congress and Senate's attention to.

by NBBooks on Mon Jun 16th, 2008 at 10:20:45 PM EST

Re: Oil Market Manipulation (4.00 / 4)

NBBooks:

But Michael Greenberger's testimony on June 3
http://commerce.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=1c9f4e27-376a -49c8-a244-25730c4bbbe8
directly implicated Goldman Sachs, Morgan Stanley and British Petroleum, and the hedge funds in the manipulating the oil futures markets through the CFTC exemption granted to the IPE in Atlanta.

He, and the Committee, are looking at the "on-exchange" trading and the use of speculative "position limits" on WTI positions maintained and cleared by ICEFutures (formerly IPE) in London.

Greenberger regards this as a "London Loophole" allowing major speculative positions to be built on WTI in a way that is not supervised by CFTC.

My case is that while that may be true, it is not actually the "speculators" (ie the hedge fund "locusts") who are causing the problem here.

It is the intermediary traders active in both the on and off exchange markets.

Major "end users" and traders active in the physical markets are not affected by speculative position limits, and can build positions as large as they like by using a "hedge exemption". They have to demonstrate that they ARE hedging - and that is relatively easy to get around, if you have a mind to.

The classic case of market exposure to big positions was the trading by Metallgesellschaft who built MASSIVE long term positions in NYMEX gasoline off exchange (they owned a refinery), and hedged them on NYMEX quite legitimately. They accumulated positions which approached 100% of the "open interest" in some gasoline contract months.

The market price curve went against them, and they were unable to afford to maintain and keep "rolling over" their position. Had MG's parent banks not stood behind it (and some say they only did this after a call from Clinton to the german chancellor), there is no doubt IMHO that the NYMEX clearing house was not capitalised to sustain the resulting losses.

I digress.

Congress and the Senate should be examining the trading in the Brent/BFO complex, and the relationship between Brent and WTI. Also a major investigation and comparative analysis should be carried out into trading patterns of and cash flows between BP and Goldman Sachs.

My definition of (micro) "market manipulation" on a regulated exchange is based upon the premise that a user of such an exchange should be able to assume that normal market forces apply: that is to say, that buyers are attempting to pay as little as possible, and sellers are attempting to sell at as high a price as possible.

It is my case (and I got shafted for exposing it) that this is routinely not the case on both the major energy exchanges, and that players are frequently "bidding up" or "offering down" the market price as much as possible in order to make profits on exchange (eg by triggering "stop loss orders") and off exchange.

As for "macro" manipulation I believe that it is in all probability the case that the price is currently being artificially held above a market "clearing rate" by a combination of speculative money/funds (eg GSCI) and sophisticated collusion between oil producer/traders and investment banks.

Moreover, this is being achieved in a way that means that speculative limits on WTI are of little use.

Of course it's true that the long term price trend is upwards, but massive excess profits ($40 to $50 plus? Who knows?) are currently accruing to producers and traders at the expense of consumers, IMHO.

by ChrisCook (cojockathotmaildotcom) on Tue Jun 17th, 2008 at 05:49:32 AM EST
[ Parent ]

$40 to $50 profits? (none / 0)

Of course it's true that the long term price trend is upwards, but massive excess profits ($40 to $50 plus? Who knows?) are currently accruing to producers and traders at the expense of consumers, IMHO.

ChrisCook, just to clarify, are you suggesting that various financial-sector players could be skimming off as much as $40 to $50 per barrel -- implying that that the real market price should currently be around $100/barrel instead of somewhere near $140?

It's hard to imagine that large buyers of physical oil, confronted with inexplicably high prices, would long remain ignorant of so much fraud. Such entities, after all, could afford to initiate any desired level of investigation.

Why would buyers put up with such massive theft? Maybe a few dollars per barrel just to grease the wheels, or for personal kickbacks, but $50?

by Ralph on Tue Jun 17th, 2008 at 06:39:42 PM EST
[ Parent ]

Re: $40 to $50 profits? (none / 0)

Umm, I think you missed the part where the good Mr. Cook mentioned who is benefiting, which is hard to believe, because you repeat it right in your own quotation: producers and traders.

So, just which "large buyers of physical oil" might you be referring to? (This is an interesting question on so many levels - how is Israel coping? Perhaps even now a Mossad team is casing the haunts of certain traders and executives of BP, Goldman Sachs, and Morgan Stanley? A sudden rash of "heart attacks" a few days or weeks from now?)

by NBBooks on Tue Jun 17th, 2008 at 07:12:20 PM EST
[ Parent ]

Re: $40 to $50 profits? (none / 0)

"Producers and traders" is everyone except the users of oil. For example, a refinery is a user of crude oil. The refinery buys crude and resells it as gasoline, diesel and many other finished or semi-finished petroleum products.

I don't think the owner of a refinery would take kindly to paying an extra $40 per barrel. In fact, I think he, she or it would be inclined to do something rather forceful about a discrepancy of that magnitude.

by Ralph on Tue Jun 17th, 2008 at 07:36:07 PM EST
[ Parent ]

Re: $40 to $50 profits? (none / 1)

Ralph:

I don't think the owner of a refinery would take kindly to paying an extra $40 per barrel. In fact, I think he, she or it would be inclined to do something rather forceful about a discrepancy of that magnitude.

Only independent refiners are in that position. Most of the big boys have refineries.

They refine the crude oil and sell the gasoline at the market price. Due to the shortage of refining capacity, most of the refiners have been coining it as well. They really don't care what the crude oil cost is since they pass it on to Joe Sixpack at the pump with their refining margin added.

The point is, Ralph, that the workings of the BFO/Brent complex are both complex and opaque. Not unlike Central Banking in fact.

We are seeing what JK Galbraith called a "Bezzle" where the losers don't know that they are losing. Although they suspect it, of course.

by ChrisCook (cojockathotmaildotcom) on Tue Jun 17th, 2008 at 08:12:40 PM EST
[ Parent ]

Re: $40 to $50 profits? (4.00 / 2)

lately independent US refiners have been getting their clocks cleaned. Check the q1 profits for Tesoro for example.

by HiD on Wed Jun 18th, 2008 at 04:53:22 AM EST
[ Parent ]

Re: $40 to $50 profits? (none / 0)

It's an auction for the input and an auction for the output. If the refiner couldn't make a profit on the other end they would stop refining. To them it makes no difference how the input cost breaks down as long as they can pass it on - and they can.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes

by Migeru (migeru at eurotrib dot com) on Wed Jun 18th, 2008 at 02:04:53 AM EST
[ Parent ]

Re: $40 to $50 profits? (4.00 / 2)

$40-50 for middlemen is silly. Almost all this price rise is accruing to the original producers. Price at the wellhead is what is crazy, though diesel margins look very very strong as well.

But it is possible that speculation has helped get us up to these levels because basically the structural shorts have no power and are price inelastic to a great degree.

Speculators have bid up the "down the curve" prices. Perhaps producing hedgers are also holding back on selling but I doubt it at these levels. Most of the majors don't even hedge their production and Saudi never did in the past. I doubt the other big OPEC players are hedging either. So a hedge fund speculating that 2012 oil will be $200 is prepared to pay $120 and sit. Especially when the margin amounts are so low. When virtually none of the world's supply is hedging down the curve, who's there to take the other side of the bet in enough size to spook them into selling? Right now $3 covers the entire WTI curve out to 2016.

So as futures roll prompt, what would bring prices down except a world awash in crude? But there is no such surplus. OPEC is wide open on production except for Iraq and Nigeria which are suffering from long term production issues. Their internal distress is not going away soon so their shut in production is not going to pressure the last remaining swing producer = Saudi. Especially when Saudi is back up near 10 MMBD like in 1980 and piling up the cash.

On the user side, people are still just gritting their teeth and paying up. Demand is just flat compared to last year. In a truly elastic market, the 6X increase in crude prices since 2002 would have led to a reduction in demand. Nope. The world is hungry for energy and the price is still cheap compared to doing without. So far only the airlines are crumbling from what I see.

So is it speculation or reality? I'd say both but mostly reality. Crude prices can rise as far as bidders care to take them because at the end of the day, the end consumer refuses to just say "stuff it" and cut usage. We could be in balance at $80 or at $150 if no one changes habits quickly.

Over time, demand will wane in the West. But since in the developing world demand is growing (and they are sheltered by govt price controls for now and by dollar weakness as well). Since there is no magic source of new cheap oil like the North Sea or Alaska in the late 70s, there's really nothing obvious to knock down prices.

There is little prospect of OPEC disunity since no one is constrained. It's like when the Texas Railroad commission finally went to 100%. They became meaningless soon after. OPEC is basically meaningless except that Saudi chooses to use them for cover.

So here we sit. Unless we get a worldwide recession or some other event to knock overall demand down say 6-8 MMBD (like in 1980-83 when the call on OPEC halved from 30 ish to 15 ish) you can forget about lower prices.

by HiD on Wed Jun 18th, 2008 at 04:50:24 AM EST
[ Parent ]

Re: $40 to $50 profits? (none / 1)

HiD:

$40-50 for middlemen is silly. Almost all this price rise is accruing to the original producers.

Right, Chris said $40 to $50 going to producers and treders, which allows most of that to go to the producers.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes

by Migeru (migeru at eurotrib dot com) on Wed Jun 18th, 2008 at 06:27:59 AM EST
[ Parent ]

true (none / 0)

but his tone implies the "traders" are the problem and the root of the evil. I'd say it's just peak oil reality for the most part.

by HiD on Wed Jun 18th, 2008 at 07:56:12 PM EST
[ Parent ]

Middlemen do not have to be taking ... (4.00 / 2)

... a $40 cut in order to be manipulating the price up by $40 ... that is, if the "market price" is pushed up by $40 in order to grab $4 in extra trading and other income (inflating option prices, etc.), then the producers get the balance of $36 ... which they are unlikely to complain about.

NB. $4 entirely arbitrary ... I wouldn't know whether on CC's argument it would be $14 or $0.40.

Utsukushikereba sore de ii

by BruceMcF (agila61 at netscape dot net) on Wed Jun 18th, 2008 at 10:07:52 PM EST
[ Parent ]

Re: $40 to $50 profits? (none / 0)

HiD:

$40-50 for middlemen is silly.

Of course it is. And I'm not saying they are making that.

BP has the most to gain from a successful "bubble" strategy, and IMHO are working closely - as ever - with Goldman, who would be getting their piece.

My understanding is that the differential between prices of sweet crudes and the crap grades is high, and I know the Iranians are filling tankers with oil they can't (or won't)sell.

I don't know what your view is on that.

I agree with you that it has to be reality in the medium and long term. But bubbles are only ever short term phenomena...

by ChrisCook (cojockathotmaildotcom) on Wed Jun 18th, 2008 at 06:46:57 AM EST
[ Parent ]

You're skating very close to libel (none / 1)

good luck on that. Suspect they don't care much what you say, but you've no proof of anything. EVERY crude oil producer has a huge interest in the highest possible well head price.

as for the light/heavy diff

from bloomberg: http://www.bloomberg.com/apps/news?pid=20601072&sid=aca3WppLEC7E&refer=energy

Prices for all crude other Saudi Arabian exports to the U.S. rose by between $1.60 and $3.20 a barrel, according to the statement.
Arab Light will be priced at a discount of $2.45 in July compared with a discount of $5.65 this month. Arab Medium exports to the U.S. in July will be at a discount of $8.30, compared with a discount of $10.45 in June and Arab Heavy grades will be priced at a discount of $13.30, compared with $14.90.

I seem to remember -3, -4, -5 rangebut I was never a crude trader so my memory could be horribly off.

That AL differential is pretty tiny. Clearly all coking refiners are dead full with AH at -15. They're having to price to fuel oil economics to move those bbls. Clearing upgrading is pinched especially in this new era of very low sulfur product requirements.

If every OPEC producer is wide open, every non-opec producer is wide open and stocks are not building anywhere, just where is the bubble?

by HiD on Wed Jun 18th, 2008 at 08:05:58 PM EST
[ Parent ]

Re: $40 to $50 profits? (none / 0)

So a hedge fund speculating that 2012 oil will be $200 is prepared to pay $120 and sit. Especially when the margin amounts are so low.

Sounds like those margin requirements need to be raised.

C'mon, guys. There are a lot of very unhappy people joining food riots and truck blockades around the world. Do we really believe the whole planet could be strangled for fuel and cash by the existence of a few cheap bets played on some distant contract?

This is not just another Enron scam. It's a global crisis, far too big to be engineered by a few cronies in some boiler room. And please don't start with the "cabal of global bankers." There is always a search for scapegoats when prices rise on critical commodities. A "round up the usual suspects" mentality can turn into slander and persecution of the designated targets.

(HiD, my apologies. This is not directed at you. I just quoted a little bit of your very sensible comment. And if I'm off base with this, please let me know.)

by Ralph on Thu Jun 19th, 2008 at 03:55:49 PM EST
[ Parent ]

Re: $40 to $50 profits? (none / 1)

Ralph:

ChrisCook, just to clarify, are you suggesting that various financial-sector players could be skimming off as much as $40 to $50 per barrel -- implying that that the real market price should currently be around $100/barrel instead of somewhere near $140?

I don't know exactly where the "market clearing" price is but it wouldn't surprise me if it weren't less than $100 per bbl even at today's $ value.

It's the producers who get the Lion's Share of that excess of course, and I doubt whether the National Oil Corporations are part of this. The financial players are intermediaries, so will not be making anything like that amount, since they are both buying and selling.

Ralph:

It's hard to imagine that large buyers of physical oil, confronted with inexplicably high prices, would long remain ignorant of so much fraud.

I am not sure one could characterise this as "fraud" actually. To me fraud implies deception, when what we have here is opacity, complexity, and probably collusion but maybe not really deception.

But what's in a name?

"Unacceptable market manipulation" is a felony in the US. If my suspicions are correct then that could well be a good description of what has been going on.

Ralph:

Such entities, after all, could afford to initiate any desired level of investigation.

Indeed I advocate a wide ranging investigation into the operation of the Brent complex over the last 10 years or so.

The current administration is owned lock stock and barrel by Big Oil so I don't see anything really happening until they are gone.

Back in 2000 I was interviewed by a couple of investigators working for Carl Levin's Senate Sub Commmittee on Investigations who were looking into the Brent market.

Unfortunately the the Senate went Republican at the crucial moment and it came to nothing.

by ChrisCook (cojockathotmaildotcom) on Tue Jun 17th, 2008 at 08:29:51 PM EST
[ Parent ]

Re: $40 to $50 profits? (none / 1)

Just what would they find in the end?

No piles of crude hidden away, no products being held off the market. A cartel controlling crude price but at their max production rate for the most part. Where is the hard evidence other than you'd like the price lower?

Might want to re-read all those Countdown to $100/$200 Oil diaries. World production is very squeezed and demand is not abating.

by HiD on Wed Jun 18th, 2008 at 08:23:40 PM EST
[ Parent ]

But ... isn't the market clearing, in ... (none / 1)

... aggregate? Producers are producing, buyers are buying ... if the market was not clearing, stockpiles would be piling up.

Is the market still in contango across the board?

Utsukushikereba sore de ii

by BruceMcF (agila61 at netscape dot net) on Wed Jun 18th, 2008 at 10:11:43 PM EST
[ Parent ]

Re: Oil Market Manipulation (4.00 / 2)

Amazing stuff for a poor generalist, CC. Recently the Saudis and other producers have said that the price of crude should be more in the range of $80-$100/bbl. Is this, if true, the reason why it is not? It would make no difference in actual supply and demand, if I understand your summary correctly. It is just that the world oil market has a giant parasite in the form of BP/Goldman that effectively would be increasing the price of crude by 30% to 40%, utilizing granted exceptions. Unwinding this situation would destroy Goldman and create counter-party risks elsewhere. I have no idea what the effect would be on BP, other than a drop in margins.

Geez, this sure looks like a rather large market "inefficiency!" One that is strangling the world economy. So were Goldman to go the way of Bear Sterns and the appropriate regulatory authorities were to deal effectively with "counter-party risks" we could have "peak oil" at a current price of $80-$100/bbl and going up instead of $140/bbl. Were MSM to make clear that we will see $140/bbl soon enough, we may be able to buy some breathing room.

No good deed goes unpunished. Take care.

If sanity be culturally normative, then by the norms of this culture I claim insanity.

by ARGeezer (argeezer a in a circle yahoo dot com) on Tue Jun 17th, 2008 at 12:15:35 AM EST

Re: Oil Market Manipulation (4.00 / 3)

ARGeezer:

Unwinding this situation would destroy Goldman and create counter-party risks elsewhere.

It would only destroy Goldman if it were Goldman's money holding the market up, which it undoubtedly isn't. Goldman are the Parasite, not the animal.

BP, on the other hand, are both Parasite and Animal due to the fact that they are producers as well as traders. It would cut BP's profit margins - particularly the money rolling in from the Forties field - massively.

(Strange to relate, the Forties oil comes ashore just up the coast and the pipeline to the Grangemouth refinery runs literally 100 yards away from where I am sitting.)

But the effect of a bursting of the bubble - which would come about if the market is both in oversupply and perceived to be - could lead to the credit lines which are supporting the off exchange "OTC" positions being insufficient.

eg as with the Tin Crisis in 1985, the physical production of tin overwhelmed the financial ability of the tin producers to support the price by stockpiling it and there was an overnight 50% collapse in the tin price from the artificial $800.00/tonne to the natural "clearing " level of $400.00/tonne.

Such a "market meltdown" in the oil market would of course have major systemic risks -which I pointed out at a conference in Lausanne about 3 years ago - due to the fact that Clearing Houses essentially constitute centralised "single points of failure" which are way undercapitalised for "Black Swan" events.

Note here that this systemic financial risk in the energy market is about to increase, now that all of the ICEFutures' open interest is about to transfer from LCH Clearnet (which clears other markets as well, therefore spreading the risk) to the ICEFutures own proprietary clearing "silo".

If I were the FSA I'd be worried.

by ChrisCook (cojockathotmaildotcom) on Tue Jun 17th, 2008 at 06:17:21 AM EST
[ Parent ]

Re: Oil Market Manipulation (none / 1)

Someone had to make use of the discrepancy between pre-$100 oil prices and Peak Oil perspectives. Goldman made a timely betting switch on CDOs as well.

(Funny how evolutionary survival works. Punctuated equilibrium, indeed.)

by das monde on Tue Jun 17th, 2008 at 07:10:29 AM EST
[ Parent ]

Re: Oil Market Manipulation (none / 0)

Punctuated equilibrium

Yeah, with the punctuation mark being a giant exclamation point inserted into the body politic just where it will hurt the most.

If sanity be culturally normative, then by the norms of this culture I claim insanity.

by ARGeezer (argeezer a in a circle yahoo dot com) on Tue Jun 17th, 2008 at 12:58:01 PM EST
[ Parent ]

Re: Oil Market Manipulation (none / 1)

Thanks for the references, especially on Goldman's CDO bet. I remember when Armand Hammer used Occidental's administrative budget to place puts on silver when the Hunt Brothers almost had the market cornered. I was doing work at Occidental that year and read their annual report while waiting for an appointment. That year the administrative division made a large, positive contribution to the overall bottom line instead of being an expense. Many at the time attributed the undoing of the Hunt's scheme to Hammer's bet. I wonder if Goldman's bet contributed to Bear Stern's demise.

If sanity be culturally normative, then by the norms of this culture I claim insanity.

by ARGeezer (argeezer a in a circle yahoo dot com) on Wed Jun 18th, 2008 at 01:00:54 PM EST
[ Parent ]

Re: Oil Market Manipulation (none / 1)

Could be. Which is why I say it's almost impossible to hold a market up artificially for very long. Eventually everyone dumps their length on you and your arms get tired. Any little crack in demand and you get destroyed.

by HiD on Wed Jun 18th, 2008 at 08:25:33 PM EST
[ Parent ]

Re: Oil Market Manipulation (none / 1)

Thanks Chris,

My dim suspicions, in general if not particular, seem amply confirmed, thanks to you. I wish I had time to really do your diary justice, but another long road trip awaits, fortunately through Colorado, Wyoming and Montana which should be glorious this time of year.

the pipeline to the Grangemouth refinery runs literally 100 yards away from where I am sitting.

I guess I had better leave this alone.

If sanity be culturally normative, then by the norms of this culture I claim insanity.

by ARGeezer (argeezer a in a circle yahoo dot com) on Tue Jun 17th, 2008 at 12:55:00 PM EST
[ Parent ]

Re: Oil Market Manipulation (none / 0)

Clearing Houses essentially constitute centralised "single points of failure" which are way undercapitalised for "Black Swan" events.

Can you elaborate on this?

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes

by Migeru (migeru at eurotrib dot com) on Wed Jun 18th, 2008 at 02:08:30 AM EST
[ Parent ]

Re: Oil Market Manipulation (4.00 / 2)

Clearing houses, investement houses...

And while the Fed may bail out still more investment houses (thus further devaluating the dollar) they will not bail you out. You won't get a dime back.

That article, by the way, on the same topic. Though the interpretation there is 100% bublish.

According to Rep Peter DeFazio (D-Or), the entity that owns the most oil in the United States right now is not ExxonMobil or Chevron or Valero: it's Morgan Stanley. So what's Morgan Stanley doing with all that oil? Speculating on the petrofraud bonanza.
[....]
The curves of a bubble are predictable, and this one [is] following in the pattern of several previous bubbles. Only this bubble, according to the economists at Bloomberg happens to be exceeding the curve of the dot.com bubble, which, when it burst, caused a loss of SIX TRILLION DOLLARS. Let me repeat. This bubble exceeds that one.

by das monde on Wed Jun 18th, 2008 at 02:23:20 AM EST
[ Parent ]

Re: Oil Market Manipulation (none / 1)

and yet there is no major stock build anywhere. You can manipulate a market for a while, but no forever. Besides, the usual play is to be long one period against a short a bit later. You hold it up, then let it puke.

My gut is Morgan has a much more effective oil trading desk than GS. Morgan doesn't have GSCI but they are a much better team. I doubt they or every other major oilco and trader are just playing along.

While they may be trying to get you, I think there may also be a bit of paranoia here.

by HiD on Wed Jun 18th, 2008 at 04:57:04 AM EST
[ Parent ]

Re: Oil Market Manipulation (none / 0)

The traders - including Goldman - are not benefiting from the bubble (if it is a bubble) the way the producers are. I am sure BP are doing Ok out of crude at $130 bbl.

I am not expert enough in current BFO market structures but my gut feeling is that Goldman's GSCI speculative funding, and BP's Forties production are potentially the basis of a "bubble".

Maybe Forties as "quasi storage" or an oil "pool". But it requires Goldman and BP to act as a team.

You don't have to be paranoid to see their long standing connections, which I am sure are more than just social...

by ChrisCook (cojockathotmaildotcom) on Wed Jun 18th, 2008 at 06:35:52 AM EST
[ Parent ]

Re: Oil Market Manipulation (none / 1)

You're straining at a gnat.

BFO is about 1% of worldwide production. If that one stream were artificially inflated, the diffs to all others would be huge (classic squeeze play). Where's the large differentials? Where is the unwanted, high quality crude oil?

by HiD on Wed Jun 18th, 2008 at 08:28:35 PM EST
[ Parent ]

Re: Oil Market Manipulation (none / 0)

You can manipulate a market for a while, but no forever. Besides, the usual play is to be long one period against a short a bit later. You hold it up, then let it puke.

I suppose they play this by ear and in the usual ways. As long as lots of money is flowing into the bubble the price will continue to be held up. But the first few players to exit will cause a stampede and the remainder will be left with no buyers at any price below, say, $80/b. Given the current investment climate a lot of investors have decided to invest in something "real." Hard to fault them for that. But they should have checked to see how real were the prices at which they invested.

If sanity be culturally normative, then by the norms of this culture I claim insanity.

by ARGeezer (argeezer a in a circle yahoo dot com) on Wed Jun 18th, 2008 at 01:15:33 PM EST
[ Parent ]

Re: Oil Market Manipulation (none / 0)

that could happen. The real market is not showing any sign of demand side variance no matter whether the price is $50 or $150. Just some slow drop off in demand growth.

by HiD on Wed Jun 18th, 2008 at 08:29:52 PM EST
[ Parent ]

Re: Oil Market Manipulation (4.00 / 2)

Traders and funds have to "invest" somewhere. Leverage games might be over, but there are still gazillions of dollars looking for "purpose". Investment in real estate and stock markets is silly now, so money is flowing to commodities and food. No-one knows what else to do with compounded riches, especially with pressure to "protect wealth" from inflation and recession. Who cares what comes next; you are just happy to fare better than the other guy.

In general, investment houses won't be big loosers. They can count on Fed bailouts and merciful rate policy. They got no hint of need to restrain. Big loosers are anywhere but Wall Street.

I am sitting in Hong Kong now, watching a German channel (for football news) and Bloomberg TV on mornings and evenings. The latter puts serious faces, brings up the word "stagflation" (with requicite mentioning of Carter), folows red numbers, and predicts nothing better for the next 2 years. They also mention how Japan brought down its oil consumption from over 5 millions barrels in the 70s, and still consuming "just" 4.5 millions now.

by das monde on Thu Jun 19th, 2008 at 01:14:51 AM EST
[ Parent ]

Re: Oil Market Manipulation (none / 1)

Your "merciful rate policy" link mentions the likely consequence of a rate hike as sending the speculators running for the exits. That is exactly why I suggested it would be a good idea a week or so ago. Pop this sucker before it gets any bigger. Would have done the same for grain before recent flooding. That, combined with a repeal of the "Enron exemption" accompanied by some real regulation could result in noticeably lower prices on several commodities, at least for a while. Then the rates could be dropped back down, perhaps even further. But what do I know. If it makes sense to me it must be wrong! :-)

If sanity be culturally normative, then by the norms of this culture I claim insanity.

by ARGeezer (argeezer a in a circle yahoo dot com) on Thu Jun 19th, 2008 at 02:13:32 AM EST
[ Parent ]

Re: Oil Market Manipulation (none / 1)

In JK Galbraith's The Great Crash 1929 he points out that interest rates in the late 1920's in the US were in the double digits but that didn't deter speculators because their expected rates of return were even higher.

The way to control speculation is to tighten margin requirements (the SEC can do that: they could gradually raise them from 50% to 100% if they really cared) not to raise interest rates, which has all kind of knock-on effects.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes

by Migeru (migeru at eurotrib dot com) on Thu Jun 19th, 2008 at 02:51:44 AM EST
[ Parent ]

Re: Oil Market Manipulation (none / 0)

Good point. Fortunately I am not setting policy.

If sanity be culturally normative, then by the norms of this culture I claim insanity.

by ARGeezer (argeezer a in a circle yahoo dot com) on Thu Jun 19th, 2008 at 11:48:07 AM EST
[ Parent ]

Re: Oil Market Manipulation (4.00 / 3)

That's a really tough topic.

it is very diffciult to udnerstand how they do it if you are not IN THERE..but it seems reasoanble that they can indeed do it. internal knowledge plus liquidity plus access plus externallly generated volatility can indeed manipulatet e amrkets..

But they know they can lose a bunch of money if any producer gets worried and floods the market, provided that they have this capapcty.

My guess is that they know that in the medium term there is not too much extra capacity at current growth rates even taking into account the proejcted opening of new important fields in 2009-2010..so they hope prices will reamin stable around 100$-200$ for a couple of years before the big jump in 2012.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Tue Jun 17th, 2008 at 06:13:53 AM EST

That's the key point (4.00 / 2)

But they know they can lose a bunch of money if any producer gets worried and floods the market, provided that they have this capapcty.

There is no producer able to flood the market. Therefore is there really any speculative premium? All the oil being produced has a home. Judging by the forward curve which only has a tiny contango to winter (prompt $134, winter $135) there is no surplus of crude oil out there.

If no one is holding back supply and no one is tanking any significant amount of oil/products, it would seem the market is just what it is. People are paying up for a valuable product that has historically been way too cheap compared to its value because production costs were low. Walk to town with a bag of groceries or 3 and a car/bus starts to look pretty damn good even at $5/gallon gas (or Euro 6 ish for people that have hard currencies in their countries).

by HiD on Wed Jun 18th, 2008 at 05:02:50 AM EST
[ Parent ]

Re: That's the key point (none / 0)

What fraction of oil production, even of oil exports, is actualy traded on the spot and futures markets as opposed to help up in internal consumption by producer countries, or in vertically-integrated operations where the same oil major extracts, transports, refines and sells it?

In other words, do we have a tiny margin setting the price of the bulk?

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes

by Migeru (migeru at eurotrib dot com) on Wed Jun 18th, 2008 at 06:25:57 AM EST
[ Parent ]

Re: That's the key point (none / 0)

I'm reminded of the "free float" in a stock.

As I understand it, there are about 70 cargoes a month coming out of BFO, and that is the basis of most global pricing.

That's about 40 million barrels which at $130bbl equals about $5bn in value.

Pretty trivial actually when you consider the scale at which these people operate.

Who thinks BP and Goldman are financially unable to manipulate the BFO complex between them?

by ChrisCook (cojockathotmaildotcom) on Wed Jun 18th, 2008 at 06:58:39 AM EST
[ Parent ]

Re: That's the key point (none / 0)

Wait.

Global oil production is over 85 million barrels per day and Brent crude is 10 million barrels per month (1/60 of global production) and Brent futures set the prices for fossil carbon products around the world? (For instance, natural gas contracts are priced off Brent futures)

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes

by Migeru (migeru at eurotrib dot com) on Wed Jun 18th, 2008 at 07:08:33 AM EST
[ Parent ]

Re: That's the key point (none / 0)

BFO is only part of what comes out of the North Sea.

I reckon one sixtieth of global production is about right.

Makes you think about the tail and the dog, doesn't it?

by ChrisCook (cojockathotmaildotcom) on Wed Jun 18th, 2008 at 12:31:27 PM EST
[ Parent ]

Re: That's the key point (none / 0)

WTI is also a marker crude for very large quantities. It's another 1 MMBD or so stream.

But Chris's contention has a huge hole in it. If BFO is so inflated, why are the differential to it for other crudes so small?

by HiD on Wed Jun 18th, 2008 at 08:35:10 PM EST
[ Parent ]

the margin always prices the whole (none / 1)

in a commoditized market.

You'd have to define producer countries for the question to be answered. The US is a producer country but imports 70% of its oil. The UK is a producer and also a huge consumer. Norway is a much bigger producer than consumer, ditto SA, Kuwait, the Emirates, Venz etc. Much of that surplus appears as refined products though as they've vertically integrated.

One easy way to answer I guess is that the US manages to obtain 10-12 MMBD (or roughly 15% of the entire world's production) as crude. Japan imports 4 MMBD, Korea, 2.5 MMBD, Spore - 1.5 MM, Taiwan 1 ish. A-R-A (Rhine mouth area) 1-2 million, France, Italy etc all import large volumes of crude.

Seems to me there are very large crude flows out there. It's very very hard to hold a market up on thin air for any length of time.

by HiD on Wed Jun 18th, 2008 at 08:17:58 PM EST
[ Parent ]

Re: the margin always prices the whole (none / 0)

It's very very hard to hold a market up on thin air for any length of time.

Yet it has happened in every bubble since the Tulip Craze. Depends on what you mean by "any length of time." The more accommodating the monetary policy, the longer it can go on.

That might be the most important factor, given that we no longer have the real possibility of market equilibrium, given the supply limitations. But the pull of the market paradigm is so powerful that most continue to insist that it exists, IMHO.

If sanity be culturally normative, then by the norms of this culture I claim insanity.

by ARGeezer (argeezer a in a circle yahoo dot com) on Thu Jun 19th, 2008 at 02:23:46 AM EST
[ Parent ]

Re: the margin always prices the whole (none / 0)

different kind of bubbles I'd say. Tulips? Who really needed a tulip bulb.

This is not just a greater fool speculative game. All of this oil is being consumed, not hoarded waiting for some other fool to pay even more.

That said, prices could come off hard to whatever price the Saudis find objectionable on the low end.

There's just no elastic behavior in the short run on energy. By short run, I mean 1-2 years in this instance.

When talking about holding up a market, I think 2 months is about the max before the others gang up on you and crush you.

by HiD on Fri Jun 20th, 2008 at 05:39:58 AM EST
[ Parent ]

Re: the margin always prices the whole (none / 0)

Who really needed a tulip bulb.

True enough about tulips. Same for the Great South Seas Bubble. But what about the recent and still unwinding American Housing Bubble. The great majority of those houses were/are owner occupied.

If sanity be culturally normative, then by the norms of this culture I claim insanity.

by ARGeezer (argeezer a in a circle yahoo dot com) on Fri Jun 20th, 2008 at 03:04:38 PM EST
[ Parent ]

Re: the margin always prices the whole (none / 0)

It was an equity withdrawal bubble. To buy cheap Chinese plastic crap.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes

by Migeru (migeru at eurotrib dot com) on Fri Jun 20th, 2008 at 03:09:14 PM EST
[ Parent ]

Re: the margin always prices the whole (none / 0)

Not so I'm afraid. There are hundreds of thousands of empty houses and there were hundreds of thousands bought by "flippers" looking for a fast buck. Quite a bit of greater fool theory in play in the housing mkt.

Whereas all of this oil is being destroyed as fast as it is being produced. I don't see any hoarding going on.

by HiD on Mon Jun 23rd, 2008 at 06:45:14 PM EST
[ Parent ]

Re: the margin always prices the whole (none / 0)

It's very very hard to hold a market up on thin air for any length of time.

Truth is the market hasn't been up in the air for so long as of yet. Either way we should know soon. Were regulators to increase margin requirements that probably would show how much of the price is speculation, but that is a big if.

If sanity be culturally normative, then by the norms of this culture I claim insanity.

by ARGeezer (argeezer a in a circle yahoo dot com) on Fri Jun 20th, 2008 at 04:47:55 PM EST
[ Parent ]

Re: the margin always prices the whole (none / 0)

Nymex margins have doubled of late. $13K now vs $5-6 K before. The interest expense is still very low compared to the profit potential.

by HiD on Mon Jun 23rd, 2008 at 06:40:23 PM EST
[ Parent ]

Art Market Manipulation (4.00 / 2)

All this reminds me of the continuing art market swindles- with slightly different cons for live artists and dead artists.

You can't be me, I'm taken

by Sven Triloqvist on Tue Jun 17th, 2008 at 11:08:55 AM EST

Re: Art Market Manipulation (none / 1)

Except art is not a commodity. It's value is entirely subjective. It's just canvas and paint unless you like it or are 100% sure other people will like it enough to take it off your hands.

Oil has real world value to most everyone.

by HiD on Wed Jun 18th, 2008 at 05:04:24 AM EST
[ Parent ]

Re: Art Market Manipulation (none / 0)

Spoken like a true Philistine ;-)

You can't be me, I'm taken

by Sven Triloqvist on Wed Jun 18th, 2008 at 06:34:52 AM EST
[ Parent ]

Re: Art Market Manipulation (none / 1)

I own some rather pricey oil daubs on canvas TYVM ;-)

by HiD on Wed Jun 18th, 2008 at 08:19:01 PM EST
[ Parent ]

Re: Art Market Manipulation (none / 0)

Peak oils?

You can't be me, I'm taken

by Sven Triloqvist on Thu Jun 19th, 2008 at 04:03:04 AM EST
[ Parent ]

Thank you very much for this. n/t (none / 0)

Diversity is the key to economic and political evolution.

by MarketTrustee (pbing@estudioinc.com) on Tue Jun 17th, 2008 at 03:15:17 PM EST

Re: Oil Market Manipulation (none / 1)

Thank you for expanding on this. Unfortunately, my worn out brain can't really follow the discussion in detail.

Would it be possible to provide a simplified step-by-step about how one would manipulate a market? I just don't understand why the market price and the futures price don't converge, and if so, why someone who paid too much for a futures contract doesn't get burned. How does a speculator manipulate the market?

by asdf on Tue Jun 17th, 2008 at 11:41:27 PM EST

you understand more than you think (none / 0)

futures and physical do converge.

You can't really manipulate a market for months on end.

Short term, a player can bid up futures which are paper contracts on very small volumes of real world oil flows (Brent is on the order of 1 MMBD as is WTI). By fiddling with the futures or market assessment settles you can make a small loss on a small volume of futures generate a large profit on a much larger physical or derivatives position.

by HiD on Wed Jun 18th, 2008 at 05:12:50 AM EST
[ Parent ]

Re: you understand more than you think (none / 1)

Can you put a limit on the extent to which speculation could be contributing to prices? 10%? 5%? 30%?

by Colman (colman at eurotrib.com) on Wed Jun 18th, 2008 at 05:15:22 AM EST
[ Parent ]

Re: you understand more than you think (none / 0)

Yup, how much of $140/bbl is overshooting?

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes

by Migeru (migeru at eurotrib dot com) on Wed Jun 18th, 2008 at 06:29:43 AM EST
[ Parent ]

Re: you understand more than you think (none / 1)

I can't. No idea.

There really is no way to gauge just want price reality is when the demand side pull is the same at $50/bbl and $150/bbl within Saudi's willingness to trim production 10-20%.

Keep in mind speculators make the most money when markets are volatile. Lots of movement is better than a high stable price. Once you've sold your length, how do you re-load for next year if the price never fades?

by HiD on Wed Jun 18th, 2008 at 07:53:39 PM EST
[ Parent ]

Meh (4.00 / 2)

Lots of speculation and perhaps your own poor experiences cloud your judgement.

First a correction

buyers may give 15 Days' notice of their intention to "lift" crude oil within a nominated 3 day delivery "window". Once buyers have specified this "window" pursuant to a Brent contract, then the contract becomes what is known as "Dated" and the cargo becomes "Wet"

The operator of the facility publishes a list for each month's liftings based on the equity owner's shares of the oil flowing in. IE, Exxon has the 10-12 cargo, Chevron 17-19 etc. Once those dates are known, the SELLERS start the 15 day hot potato game going.

If Chevron has sold their cargo, they ring up XYZ and say, "Against our sale #101, we nominate dates Month/17-19" (plus a few more bits and bobs. Takes about 25 seconds to nominate a cargo. This MUST be done prior to 5 PM (IIRC) on the 15th day prior (the 2nd in this example). YXZ either takes the cargo for his use or passes it down a chain. Dozens can be in a chain and there can be various circle outs (the cargo comes back to say XYZ who then starts a new chain). Finally some poor operations bugger simply can't get the info down the line before 5 o clock and they're stuck with the wet oil. This happens a lot when a squeeze is on as the paper is bid up by the financial shorts who have no interest in the actual oil.

As for your BP/Goldman speculation. There is defn a lot of overlap. Dick Bronx came from BP. But Cohn came out of the gold area and Blankfein was fixed income IIRC before he was named head of commods in the 90's (could be wrong).

the GSCI rolls were a nightmare in my experience. While GS knows how much they have to roll and on what dates, everyone else does too. The dates are defined by the contract terms and the volumes are no mystery if you have an idea of open interest which I believe is also public info. The locals and other speculators were VERY well informed. In my day, it was damn difficult to make money on this for the trading desk.

Times may have dramatically changed. Volumes may be so large that hammering the month-month spreads at the close may be worthwhile, but any idiot can figure out where front month/second month was trading at noon and then see how much it is different in the last 10 minutes. If GS is steadily hosing their customers, shame on them. And also the customers for staying in the investment.

As for collusion with BP, I can say I always found Gary Cohn a straight shooter. After the broker commission collusion scandal of the early 90s that forced out a number of J. Aron bigwigs, they were very cautious about even the appearance of impropriety. So unless you have hard info, I'd be very careful about making those sorts of accusations.

As for BP itself, their track record speaks for itself. I couldn't possibly comment ;o)

by HiD on Tue Jun 17th, 2008 at 11:57:54 PM EST

Re: Meh (none / 1)

HiD:

As for BP itself, their track record speaks for itself. I couldn't possibly comment ;o)

It does indeed, and BP's are the big beneficiaries here.

Goldman are intermediaries, and IMHO are as good in regulatory terms as any, and better than most, in the way they operate.

As I heard it, Gary Cohn and John Shapiro of Morgan Stanley agreed over dinner to fund the ICE initiative. Only Goldman and Morgan put up cash: everyone else (and BP were first in line) got equity in return for liquidity commitments.

They then whistled up Mr Sprecher from the boondocks, got told by NYMEX to bugger off, and then made IPE an offer they couldn't refuse.

In the meantime, it seems to me - and you tell me if I am wrong - BP took over as top dog from Shell in the BFO complex.

As for collusion, you don't need to put things in writing if you have a nice comfortable relationship that starts at the top and has been going on for 10 years plus.

My gut feeling - and it has damn all to do with bad experiences - both are involved in manipulation - as is virtually everyone else.

Whether this is either illegal - ie "unacceptable" in US legal terms - or involves anything more than a tacit understanding, I don't know.

As Mig and I were discussing upthread, it really does not take much money and production to control the BFO complex by putting a de facto floor under it if one wanted to, combined with talking it up at every possible opportunity.

I'd be only too happy for someone to prove me wrong. But IMHO the operation of the BFO complex, and specifically BP and Goldman's relationship over years within it, deserves investigation.

by ChrisCook (cojockathotmaildotcom) on Wed Jun 18th, 2008 at 12:55:37 PM EST
[ Parent ]

Re: Meh (none / 0)

the operation of the BFO complex, and specifically BP and Goldman's relationship over years within it, deserves investigation.

SECOND

Unfortunately the investigations are usually inconclusive and typically come after the crash.

If sanity be culturally normative, then by the norms of this culture I claim insanity.

by ARGeezer (argeezer a in a circle yahoo dot com) on Wed Jun 18th, 2008 at 01:25:57 PM EST
[ Parent ]

Re: Meh (none / 0)

But usually the boom, whether high-tech stocks, real estate, etc., is regarded by the establishment a good thing, so that there would be no reason to investigate the boom, just the crash. Oil is a bit different, as a lot of those benefitting are in the Middle East, Venezuela, Russia, and so on, so there is at least a chance of an earlier investigation.

I agree with you about the inconclusive part.

by gk (g k quattro due due sette "at" gmail.com) on Thu Jun 19th, 2008 at 02:51:06 AM EST
[ Parent ]

After my time (none / 0)

Shap and Cohn may well have decided to start up ICE. Doesn't imply collusion on the exchange itself.

As for BP/Shell on Brent. No idea. The problem with both marker crudes is they are small streams pricing huge flows elsewhere. But the system seems to like that just fine. Could be worse. Platts could be making ALL the prices using 22 year old journalism grads to try to sort through the truths of a market populated by liars cheat and thieves.

by HiD on Wed Jun 18th, 2008 at 07:50:53 PM EST
[ Parent ]

Re: After my time (none / 1)

HiD:

Platts could be making ALL the prices using 22 year old journalism grads to try to sort through the truths of a market populated by liars cheat and thieves.

Well, you clearly think that there's nothing amiss in the marketdespite the above - and you are better informed than me.

But I think you underplay the BFO benchmark, and overplay the absence of differentials. People have no idea where the price is, and IMHO BFO is leadin price formation it, and BFO is subject to manipulation.

All sweetness and light then; BP and Goldman are just good friends; and ICE is a first rate, open and transparent market.

...and I thought you were the cynical one.

by ChrisCook (cojockathotmaildotcom) on Thu Jun 19th, 2008 at 03:12:25 AM EST
[ Parent ]

Re: After my time (4.00 / 2)

I'm cynical about human behavior no question. That's one reason I find your analysis flawed because in this instance you're not looking at the entire chessboard very well, IMO. This is way more than just a paper market game.

There are a large number of refiners, oilcos, independent traders, (liars, cheats,thieves).... etc that have an interest in making the market go down. Assume you are a trader/hedge fund and bought crude at $100. Now it sits at $130 and you've made a fat wedge. But it's booked all the way down the curve since you mark to market. The boss asks "what are you going to do today to make more?" Do you dare stay hugely long hoping for even more or do you start booking the profit to get the bonus check assured?

If you more buy at $132 and try to sell for $132.25 that's no fun. You need to make it puke to be able to re-load. There's no contango to play, no backwardation to play. Nothing obvious I see that won't get destroyed by the slightest bit of news.

What's in it for Vitol, MR, Valero, Hess or any other trader or crude short refiner to play along with those you are pointing fingers at and not just hand them ALL the BFO until they choke on it instead? If there was any significant differential, you could deliver other grades against Brent or WTI. But there isn't. Other than the super heavy sours, everything appears to have a home.

Ordinary people may have no idea what the price is/should or could be, but the industry is well aware. It's true more people in the oil biz are happy with high prices than with low. But it's not uniformly so across the world. Airlines are screwed, trucking companies are screwed. Chemical companies are staring a recession in the face. Other than people who get oil out of the ground, who's happy? Who just wants to hand your accused great whacking checks every month?

by HiD on Fri Jun 20th, 2008 at 05:55:35 AM EST
[ Parent ]

Oil Market Manipulation | 69 comments (69 topical, 0 editorial, 0 hidden)

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