Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Your basic premise that oil markets have been supplier controlled is an obvious fact, but most of the rest of this is an ivory tower conclusion hunting for facts to back it up.

First, the Seven Sisters controlled the crude market for yonks.  But they kept the price stable at $4/bbl ish which was low enough such that the producing nations were screwed more than the consumer.  Life was easy as they built refineries like crazy and made good money providing cheap energy to all comers.

After OPEC found it's power in the 70's they have kept oil prices (roughly) where they wanted them ever since.  The price downwaves we've had since the last price shock/peak were solely due to Saudi forcing the rest of the crew to adhere to quotas.  They indeed have kept prices lowish to prevent too much investment in alternative sources which is what turned the price spike in 1978-82 into a rout when demand dropped at the same time production ramped up.

The trouble with your theory is that you ignore the real physical world where demand has steadily increased since 1985 such that we're now at 84 MMBD.  Meanwhile the supply projects that swamped the market in the 80s have declined naturally.  The OPECers (ex Saudi) now have quotas that represent their entire production.  Cheating is no longer possible therefore.  And Saudi has ramped up their production such that all the projects done in the 1975-85 period are running pretty much full bore.  China and India are poised to demand even more as they come into the modern world threatening a supply shortage.  New projects are coming on line elsewhere, but not enough to beat the normal decline during this low price period from 1985-2001.

So there is no more surplus.  Instead of a world with 10 MMBD surplus or more up it's sleeve in case of a problem, we have a relatively balanced situation.  Add that to BUSHCO idiots inflaming the Middle East, turmoil in Nigeria, turmoil in Venezuela and minor turmoil in Mexico and you have a situation where what used to be a small event capacitywise is critical.  Even in the old days a Nigerian revolution was good for a 20% price spike.  It's just no one much noticed $16-->$19 on crude at the pump.

The oil majors are no longer price setters on crude.  They are price takers from OPEC.  While Saudi might wish to keep Bush in power, I don't see them ramping up production.  They've been giving the mkt whatever it wanted all year hence a steady $1/month contango.  We're just heading into the low demand period, fall, and that has brought us back on price to where we were in March/April -- $68 ish WTI.
Find me the conspiracy without hand waving arguments.

Also the idea that :

Supplier Controlled Markets may have suppliers who partake in the practice I call patent shelving. Patent shelving is to do the research and development to find innovative alternatives, patent them, and then not put them into production

is tin hattery of the first order

To believe this you must believe:

  1.  Exxon would rather have the profits of <10% of the oil market instead of the profits a new technology that allows them corner a much larger energy market  and reap the high profits that could bring.  Oilco management likes the money a lot more than the oil.
  2.  That only the big oilcos have access to this new innovative technology and that GE, Silicon valley, ABB Japan Inc or any other technology group could not invent said technology or are working in concert with big oil without getting any obvious payment.
  3.  That countries like China, who've been able to penetrate and steal secret nuclear technology cannot do the same to get this magic energy technology.Add Israel, France, Japan, Germany, Korea and others to the list of smart, aggressive countries that are short oil and spend big %'s of their GDP on imported energy.

They're all rolling over for big oil??  
Best be a double layer tin hat.  

Your understanding of the mogas market in the US is very poor.  First, the oil majors don't run the NYMEX where the bulk of wholesale price for the entire country is set.  Other areas trade as diffs to the NYMEX +/- 3 to 10 cts, with the USWC being the least linked.

Wall Street, physical traders, importers such as Venz rule the NYMEX = NY market.  They could not give a crap about how much Exxon makes.  On DK another poster pointed out the biggest US Independant refiner Valero doesn't even have an upstream biz to protect.  They are smart,aggressive speculators compared the no hopers at Chevron, Exxon and Shell and have far more to say about mogas prices on the Merc.

Mogas has indeed dropped dramatically in the last 30 days.  From about $2.20 on the NYMEX to about $1.70 so roughly 25% at the wholesale level.  Greater than your 16% which is skewed by the relatively fixed tax, marketing, transportation and dealer cost/profits.  This is pretty extreme in the energy markets but not uncommon.  In fact the nat gas price collapsing this spring from $15/MMSCF to $6 today is a 60% drop.

The causes of both can just as easily be explained by normal behaviour in a supplier dominated market.

First, as an aside, the role of speculators has increased on futures/forwards markets.  Hedge funds are keenly interested these days in taking some exposure to commods as they do not correlate with stocks.  And can be inverse.  Helps smooth their performance.  Regular folk can play via the GSCI or other instruments.

This has resulted in the back end futures actually dragging up the front in some ways.  Reversion to the old mean is no longer likely as 10 year out paper is no longer at the old mean.  It's at $50+.

What's going on today then?

The mogas market positioned itself for a repeat of last year's hurricane season.  If you remember, the initial projections were for nearly as many and nearly as many severe hurricanes.  Traders filled tanks, refiners ran hard and speculators bought futures for August/Sept in a big way.  People played from the long side from the most part.

What actually happened?  The #1 rule of markets took hold-- "the market moves in the direction that screws the most players"  A more polite version is that once conventional wisdom is factored into the market, the odds are you move the opposite direction.

Demand was high but stable to last year so inventories held up.  We had no severe refinery disruptions.  Hurricane season has been a big nothing so far.  There is plenty of gas in tank

So as a speculator that bought mogas up to a $15/bbl crack over crude, what do you do now?  Mogas season is over.  Demand will slide.  You will have to pay a fortune to roll Sept futures into Oct as that market was backward for a number of reasons -- demand, quality, fear factor.  Sept went off the board last thurs but any rolling/liquidation started sooner.

The length had to puke.  And puke they've done.  Mogas cracks have collapsed to $1.70/gal = $71.5/bbl vs $68.5 crude or $3/bbl.  That's about where you would find them back in the glut refining days of the 90's this time of year.  Refiners will keep running as heat is much more profitable, but this will put a damper on their ardor.

So there you have it.  No great mystery or star chamber conspiracy.  

Do I think Oilcos are well behaved, honorable corporate citizens?  Of course not.  But they don't have the power to make oil prices wave to fix elections like this tin hat diary proposes.

by HiD on Thu Sep 7th, 2006 at 04:34:30 AM EST
Excellent piece HiD.

People tend to forget that Peak Oil is not so much about the amount of recoverable oil - that is a function of price, and the trade-offs in relation to Energy used to get at it.

But Peak Oil as a peak in the level of production is a mathematical fact, and I believe that "economic growth" is now running up against this level.

The showdown is therefore between the global reserve currency ie deficit-based Fëd IOU's aka Dollars and the value of oil.

Because Oil is not priced in Dollars: Dollars are priced in Oil.

The absolute level of oil price is down to supply and demand, and since spare capacity is low and can only get lower as growth continues it really is not something Suppliers can do much about other than count their money.

The true cartel is the unholy alliance of intermediary oil traders and "Wall Street Refiners" who, among other things, own the major exchanges. Particularly ICE.

These guys manipulate the spot and benchmark derivatives markets systemically. Volatility is, I believe, far higher than that warranted by events. You only have to look at who is making the money from trading energy to see who the culprits are.

"Unacceptable Market Manipulation" is a US felony: that implies that there is a such a thing as "acceptable" market manipulation, and I guess that is exactly the level to which oil trading has sunk (or maybe it never rose above it)

Chris Cook

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Sep 7th, 2006 at 04:59:24 AM EST
[ Parent ]
wall street and the rest of your unholy alliance do not have a desire for high prices though.  the money is in the volatility.  So half the time we rammed the price down, not up.

I also only think dollars are priced in oil to the extent Saudi wishes them to be.  And even then not 100%.  Our economy is not that levered to oil any more.  And they hold far less of our junk paper than China/Japan/China/Korea.  Perhaps dollars are priced in toasters and TVs????

As for "acceptable" market manipulation.  It's an ugly grey area.  Always made me queasy to do business just to make Platts notice.  But in thin markets with no trade at times, what else can you do to prove a point?  If you think the market should be lower based on your view of fundamentals, and have both physical and derivative bets on backing that view, do you have an obligation to stay out of the market to remain pure?  Or do you force the market to trade to establish a "real" price level?  the posturing and game playing got pretty childish when the number of players got so few that everyone pretty much knew what the others were up to.  Not fun at all.

I found the idea that people let 22 year old journalism grads working for Platts/Argus set 90% of the oil price to be a crime as well.  I tried to get the industry to do more fixed price biz.  Then smart players did well compared to the crooks at certain trading houses of the Dutch/Swiss variety.  

the crap on the IPE was pretty ugly though.  However, if Statoil, Esso, Shell etc wished to stop it they had the power to do so.  Just stop selling the crude off the settles and instead use fixed prices or monthly averages.

by HiD on Thu Sep 7th, 2006 at 05:22:42 AM EST
[ Parent ]
I've never undestood what the laws about "market manipulation" where standing for. Any buy or sell influence price, if liquidity is not there and you move the market with your trade volume, so what?

Markets set a price for a thing, but also a price to pay to set the price to whatever you want, it's builtin with the idea of a market.

Any idea?

by Laurent GUERBY on Thu Sep 7th, 2006 at 06:58:37 AM EST
[ Parent ]
some classics I think are clearly into the black

  1. doing a trade through a broker at $100/unit when the market was $98 yesterday.  Undoing the trade or doing an offsetting trade in private to make up the difference.  Move the print without it costing anything.

  2.  Lying full stop re a trade.  This is the sort of thing the Enron types are doing time for (or at least paying fines).  More common than I'd like to think.

  3.  offering through the bid in such size that the buyer cannot absorb it physically but insisting on all or nothing.  Easily done in barge lot markets.

  4.  Refusing a buyer claiming credit issues etc where none really exist.  The brokers usually find a "sleeve" to bust this up.  IE put BP in the middle knowing both parties will trade with BP.

trying to remember the rest of the V..../MR playbook.

  1.  Loudly offering through one specific broker all over the market (to force the price down) but not picking up any other phone to trade.  And hiding from the one broker until after the time of day the market prices are determined by Platts/Argus.  Pet brokers know where they make their money and will protect their best customers.

  2. Selling early in the day before the bulk of the market is at their desks in order to set an artificially low price.  Then try to jawbone Platts into reflecting a low ball trade in the range.  Perhaps merely in the grey here.  Platts doesn't have to be stupid.  

  3.  Not actually performing when the time comes.  Hard to prove damages if a small lot slips a few days, but the deal could have been done in a narrow date range to influence the print on Platts.  And perhaps paying damages on a small lot in order to make 10X on a larger one is a profitable scam.

  4.  Agreements not to compete or to collude.  I've had major players suggest this to me over lunch.  "we can keep it off the phone lines".  no thanks.

  5.  Bribe the reporter.  Perhaps just ugly rumors.  I've no proof whatsoever and no suspicions about anyone I ever worked with.

  6. Threaten the reporter.  I've seen one shaking in her shoes at a party.  

If I wrack my brain I could probably think of a few more scams.  It's a little harder on exchanges.  The deals actually do get done, but even then players working in collusion can undo losing trades off exchange later.

but I agree with your basic thrust.  If I'm offering and there are no bids until I've moved the market 5%, tough rocks for the longs.  Buy my oil or STFU.

Good thing it's been 10+ years and my memory is so foggy.....

by HiD on Thu Sep 7th, 2006 at 07:26:13 AM EST
[ Parent ]
The information based cheats are another story (insider trading, spam to raise stocks, ...). The issue is that it's very hard to prove so everyone (the rich) play.

An exchange is place where the one without information give plenty of money to the one with information, this is not going to change  :).

Other schemes you suggest seem to be based on the corrupt brokers / specialists operating in some US exchanges, and they no longer exist when you've removed the fat dinosaurs (they are disappearing slowly), in real electronic exchanges with no recurrent "upstairs" shadow deals.

Some electronic books are not fully open (hidden sizes, ...) but that's not a real issue.

Then the obvious question (related to your "open" and no one here yet) is why are we setting for continuous time trading from open to close?

In particular I like the way the day closing prices are fixed in some market: everyone has five minutes to put all their buy and sell orders in the book (with no execution), then the price is set to the level that maximise volume and all relevant trades are done at this level. Doing that something like four times a day would be largely enough. If there's a news too close to the five minute, the exchange can delay by 30 minutes or one hour and that's it.

by Laurent GUERBY on Thu Sep 7th, 2006 at 02:43:26 PM EST
[ Parent ]
In particular I like the way the day closing prices are fixed in some market: everyone has five minutes to put all their buy and sell orders in the book (with no execution), then the price is set to the level that maximise volume and all relevant trades are done at this level. Doing that something like four times a day would be largely enough. If there's a news too close to the five minute, the exchange can delay by 30 minutes or one hour and that's it.
Most exchanges have opening and closing auctions, I suppose to avoid orders piling up the way they do on e-bay.

Nothing is 'mere'. — Richard P. Feynman
by Carrie (migeru at eurotrib dot com) on Thu Sep 7th, 2006 at 04:00:09 PM EST
[ Parent ]
I don't think the ebay second price auctions for one item (one seller, N buyer) are comparable to closing price for markets as described (N sellers, M buyers)

ebay of course could create a formal market for sufficiently similar items :)

by Laurent GUERBY on Fri Sep 8th, 2006 at 03:16:23 PM EST
[ Parent ]
closing prices can be done relatively fairly.  But still can be manipulated up or down slightly as players absorb a loss on the exchange if they are levered 5X on some off exchange derivative.  that's what so offends Chris Cook.

but then, no one is forced to do derivatives that price off of the close.  

by HiD on Thu Sep 7th, 2006 at 06:11:37 PM EST
[ Parent ]
The trader that sold you the derivative will have hedge orders in the book too, they should cancel this kind of thing.

And asianing rules indeed :).

by Laurent GUERBY on Fri Sep 8th, 2006 at 03:11:11 PM EST
[ Parent ]
Why have opening and closing times at all?  It seems anachronistic not to trade 24/7.
by StephenAus on Thu Sep 7th, 2006 at 11:47:55 PM EST
[ Parent ]
Nothin dumb in your question, we're just discussing the options and 24x7x365 is one of them :).

There are many plausible reasons to think 24x7x365 would be bad, for example if you're a person doing your own trading, you can't be awake 24x7x365, so you de facto create intermediate layers of professionals.

To me, as discussed here (assuming you want open capital markets), low frequency (a few times a day or even once every few day, weeks, ...) auctions would encourage people to place long-timed buy and sell orders based on their evaluation of the company traded, rather than short term trends and fluctuations.

Note that in practice traders on currency markets for big banks ("FX" traders) do roll their books from continent to continent each with its own trading team and do nearly 24x5 trading.

Some companies also have their stocks listed on multiple exchanges on different continents (it's called "ADR"), so you kind of have 24x5 trading. Some companies are rolling back those multiple listings (it increase compliance costs and the benefit isn't great any more in the internet age).

by Laurent GUERBY on Fri Sep 8th, 2006 at 03:08:41 PM EST
[ Parent ]
Oh, and on the subject of Supply and Demand, the infinite supply of Dollars is running up against a reluctance on the part of Oil sellers to receive them.

Which is a story in itself, particularly all the conspiracy stuff re the Iran Oil Bourse.....

Chris Cook

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Sep 7th, 2006 at 05:09:27 AM EST
[ Parent ]
I keep being tempted to put up a diary "what ever happened to the IOB and the imminent war it will cause"

You should be the person most in the know.  Is it still on the drawing board?  I still maintain (and agree with Jerome) that no one in their right mind will play on a bourse where the biggest player is also the rule maker.  particularly if they are also religious nutjobs.

by HiD on Thu Sep 7th, 2006 at 05:24:54 AM EST
[ Parent ]
The following text is a letter delivered early July to President A, who has been a bit pre-occupied recently.

My recent interview


has just been translated into Farsi by a publication in Tehran and there should be some excitement there in the next week or two as a result.

Best Regards

Chris Cook



06 July 2006

His Excellency Dr. Mahmoud Ahmadi Nejad,
President of Islamic Republic of Iran,
Presidential Office

Your Excellency

Petroleum Exchange Project

We had hoped that we would not need to write this letter, but regret to say that all other avenues having been exhausted, we must approach you directly in respect of a matter of urgent importance both for the global market in energy and for Iran specifically.

In June 2001 we wrote to the Iranian Central Bank in respect of the excessive oil market volatility - and consequent losses to Iran - due to market manipulation by oil traders and investment banks. We recommended that Iran lead the formation of a Middle Eastern Petroleum Exchange in order to address this problem by developing a Persian Gulf oil market benchmark price.  The problem of excessive volatility we identified has recently become much worse due to massive speculation by "hedge funds".

The Wimpole Consortium, of which we are the founder Members, and in which the Tehran Stock Exchange Services Company ("TSESC") is our valued Iranian partner, was awarded the contract in mid 2004 by the Oil Ministry to take forward this important initiative. Profiles of key individual Consortium members are attached for your information: the Consortium also included a major UK law firm and an oil market consultancy, among others.

We carried out a great deal of work to a very tight schedule and delivered a major pre-feasibility report to the Oil Minister's Advisor in August 2004 without either pre-payment or a formal contract, having been persuaded to do so by the Advisor's eloquent argument that trust and integrity in business dealings are the Islamic way and that his oral and informal written instructions were entirely reliable.

Since then progress has been more apparent than real and while our comprehensive report has been used as a reference document by the Oil Ministry for the purpose of acquiring permission from the Exchange

Council of Iran for the establishment of the exchange as a legal entity, its contents have in practice otherwise not even begun to be implemented and we remain unpaid in respect of it.

This letter was prompted by our concern - and sheer disbelief - at finding that it is apparently the intention for the proposed "Oil Exchange" to be a mere "photocopy" of the existing Tehran Metal Exchange, which itself is not a noted success, nationally or internationally.  

Metals markets are entirely different in nature from markets in the many different qualities, delivery points and specifications of oil and oil products which typically require the services of "brokers" to facilitate transactions.  Metals transactions are "quote-driven", being centred upon a community of "market-makers", while oil markets are "order-driven" facilitated by brokers.

When compared with recent developments in Dubai (NYMEX) and Qatar (Energy City/ IMEX) such a travesty of an Exchange - little more than an expensive new NIOC sales office - would expose Iran to international ridicule, particularly in view of the massive, and justified, global interest in the "Iranian Oil Bourse" project.

This project has from the outset been plagued by obstruction and delays to the extent that we were obliged to call upon your predecessor personally in order to be able to make the little progress which has taken place so far.

The reason for the delays appears to be resistance from elements in the Oil Ministry who oppose any change to existing market practice and we and TSESC are agreed that the effect of the current proposal -which clearly emanates from this faction -will be to entirely nullify the project's intended purpose.

This is in direct contradiction of your Excellency's clearly stated desire for increased transparency in the oil market both within Iran and internationally.

With your Excellency's permission, we will briefly summarise for you our proposed strategy, based upon our report two years ago, but considerably updated in the light of recent market developments.

Firstly: we propose an International Energy "Clearing Union" - essentially a decentralised market network on which buyers and sellers transact with each other backed by a collective "mutual" guarantee and "default fund".  

This "partnership-based" model is both Islamically sound (being a very
close cousin of "Takaful") and, we believe, superior to the existing centralised Western "Clearing House" model.

Secondly, we propose "asset-based" contracts based upon actual "ownership" of  "Equity Shares" in "Pools" of crude oil, products or even LNG. The effects of this structure would be:
(a)    a new mechanism for foreign investment in the development of Iran's energy assets without the complexity and problems of "buybacks";
(b)    a new pricing mechanism specifically for LNG which will supersede existing crude-oil based pricing, which is subject to manipulation;
(c)    to address -through the creation of a more viable alternative - the un-Islamic aspects of "deficit-based" Western derivative contracts.

Thirdly, we propose to integrate this Clearing Union with an upgraded and updated Iranian Banking and Capital Market system and strongly recommend therefore that this simple market infrastructure project now be re-assigned to the Iranian Central Bank, with appropriate Ministerial oversight. This was the logic that lay behind our proposal being addressed to the Central Bank governor at the outset.

 If the neutral Central Bank were to be responsible for the project, then there would no longer be the current conflict of interest - and lack of credibility internationally -of the proposed Exchange largely controlled by its principal Seller.  

We believe that it is both possible and desirable for Iran to lead the extension of this proposed "Clearing Union" to include other producer and consumer States, and we would aim to assist in the development of contracts and trading mechanisms to provide a new oil pricing benchmark in the Persian Gulf, and possibly other pricing points, free of manipulation, speculation and hence of excessive volatility.

In summary, through this plan Your Excellency can deliver upon your undertaking to the Iranian people to improve transparency in oil transactions in Iran and at the same time play the leading role in the development of regional financial markets that is proportional to Iran's influence and pre-eminent status.  Moreover, by adopting the above strategy, excessive market volatility - and consequent losses at the expense of market intermediaries - may be reduced to a minimum.
At such a sensitive point in international relations, Iran can provide a constructive and positive new partnership-based approach to global trade and finance founded upon the values and traditions of Islam and demonstrating conclusively Iran's good faith and peaceful intentions.

Finally, we wish formally to request the opportunity to explain our strategy to you personally and, if you approve, to then brief key members of your administration and plan implementation, perhaps at seminars to be convened for the purpose.

We trust that Your Excellency will be able to give explicit instructions that we be paid forthwith in respect of the work carried out in all good faith almost two years ago and thereby clear the way for what has the potential to be perhaps the most important development in global markets of this century.

Yours sincerely,

Chris Cook - Senior Partner

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Sep 7th, 2006 at 12:42:56 PM EST
[ Parent ]
looks like the IOB is going nowhere fast if they aren't even going to pay the designers.

Can't say I'm surprised much.

by HiD on Thu Sep 7th, 2006 at 06:29:58 PM EST
[ Parent ]


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