A rogue oil commodities broker was caught manipulating a spike in world oil prices forcing his company to eat $10 million in losses. The disclosure occurred Tuesday when the price of crude oil reached a year’s high $73.50 a barrel at a time when the U.S. posts its highest demand on gasoline for the summer vacation season. By Thursday oil prices fell to $66.50 a barrel, down almost 10 per cent from Tuesday’s peak.
The unauthorized trading took place on the Brent oil market in Europe, one of two oil commodities trading exchanges along with the one in New York. According to The Financial Times:
PVM Oil Associates, the world’s largest over-the-counter oil brokerage, said on Thursday it had been the “victim of unauthorised trading”. The privately owned company said that as a result of the unauthorised trades it had been forced to close substantial volumes of futures contracts at a loss. (PVM’s CEO estimated the loss at $10 million).
London-based PVM said it had informed the Financial Services Authority, the UK regulator. But officials at the Commodity Futures Trading Commission, the US regulator, claimed they had been kept in the dark for several hours in spite of an agreement between the watchdogs last year to exchange such market-sensitive information spontaneously.
Oil traders in London and New York said the “unauthorised trading” explained the exceptional spike in business activity and prices in the early hours of Tuesday that some initially thought must have been caused by a geopolitical event. “Trading volumes rose overnight and prices jumped more than $2 a barrel without apparent justification,” a senior oil trader in New York said.
Prices rose in one hour from $71 to $73.5, the highest level for the year, according to Reuters data. In total, futures contracts for more than 16m barrels of oil changed hands in that hour – equivalent to double the daily production of Saudi Arabia, the world’s largest oil producer, and far more than the traditional 500,000 barrels for that time of the day.
This is the second recorded episode of rogue trading in the oil market this year. In May, an oil trader at Morgan Stanley was banned by the City watchdog after he hid from his bosses potential losses on trades made under the influence of alcohol, according to The Financial Times.
These disclosures support a CBS “60 Minutes” report earlier this year that oil speculators were the cause of prices reaching an all-time high of $4.11 per gallon of gasoline in the United States last summer.
Meanwhile, the U.S. government’s Energy Information Agency in its weekly report July 1 forecasts that this summer’s gasoline prices have peaked. The U.S. average retail price for regular gasoline fell 4.9 cents in the last week to $2.64 per gallon, the first weekly decline since April 27.
Oil pricing is a complex mechanism but the major drivers are supply and demand. The demand in the U.S. is 8% less than last year because of the residual effect of last year’s record pricing.
The EIA report explains:
In early 2009, there were few indications that gasoline prices would increase to their current levels. Average world crude oil prices had fallen below $40 per barrel, less than one-third the price of six months earlier, and attempts by OPEC members to bolster prices by reducing output had yet to produce significant results. Gasoline demand had been weakened by previous high prices and the economic downturn, and U.S. inventories were in the middle of their seasonal average range. However, as 2009 progressed, a number of factors, including OPEC export discipline, relatively flat non-OPEC production, and some early indications that the economic situation was stabilizing, contributed to a significant recovery in crude oil prices, despite the impact of continued global economic weakness on world oil demand. U.S. gasoline demand, which dropped to extremely low levels during the third quarter of last year, has strengthened since then in comparison to prior-year levels. Last September, U.S. gasoline demand was over 8% lower than it had been a year earlier. By March and April of this year, with significantly lower prices, gasoline demand was only 2 percent below its level of a year before. Domestic refinery gasoline production and imports remained low, in expectation of lackluster demand, resulting in a drop in inventories in April and May, ahead of the traditional peak summer driving season. Although retail prices are at their lowest end-of-June level since 2005, the solid uptrend over the past several months has prompted consumer anxiety.
My take all along has been the oil speculators, not Big Oil, have been screwing the American motorists from the get-go. This story reinforces that suspicion.