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Posted by on Jul 3, 2009 in At TMV, Economy, International, Society | 2 comments

Happy Motoring, America; Shafted Again

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.

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  • Jim_Satterfield

    Market speculation of all kinds is a highly over-rated activity open to abuse. While I’m not saying that it should be banned it badly needs re-structuring. One person should not have the ability to hose an entire market and/or their employer like we have seen.

  • Scary, and true. But the giant player in this, the creator of the oil price bubble and many others (real estate, dot com, oil, the bailout and even the Great Depression) is Goldman Sachs, dubbed “The bubble machine” by Matt Taibbi in Rolling Stone. It’s a must read article, though a bit profanity laced as Matt can be. I’d be interested in free marketeers’ take on this article, please. The entire article can be read on the excellent Zero Hedge, HERE. Highlights:

    Dot-com: The basic scam in the Internet Age is pretty easy even for the financially illiterate to grasp. Companies that weren’t much more than pot-fueled ideas scrawled on napkins by up-too-late bong-smokers were taken public via IPOs, hyped in the media and sold to the public for megamillions… They did this by setting up what was, in reality, a two-tiered investment system — one for the insiders who knew the real numbers, and another for the lay investor who was invited to chase soaring prices the banks themselves knew were irrational. While Goldman’s later pattern would be to capitalize on changes in the regulatory environment, its key innovation in the Internet years was to abandon its own industry’s standards of quality control.

    Goldman’s role in the sweeping global disaster that was the housing bubble is not hard to trace. Here again, the basic trick was a decline in underwriting standards, although in this case the standards weren’t in IPOs but in mortgages. By now almost everyone knows that for decades mortgage dealers insisted that home buyers be able to produce a down payment of 10 percent or more, show a steady income and good credit rating, and possess a real first and last name. Then, at the dawn of the new millennium, they suddenly threw all that.. out the window and started writing mortgages on the backs of napkins to cocktail waitresses and ex-cons carrying five bucks and a Snickers bar.
    And what caused the huge spike in oil prices? Take a wild guess. Obviously Goldman had help — there were other players in the physical-commodities market — but the root cause had almost everything to do with the behavior of a few powerful actors determined to turn the once-solid market into a speculative casino. Goldman did it by persuading pension funds and other large institutional investors to invest in oil futures — agreeing to buy oil at a certain price on a fixed date. The push transformed oil from a physical commodity, rigidly subject to supply and demand, into something to bet on, like a stock. Between 2003 and 2008, the amount of speculative money in commodities grew from $13 billion to $317 billion, an increase of 2,300 percent. By 2008, a barrel of oil was traded 27 times, on average, before it was actually delivered and consumed.

    I credit this article with souring me on the cap and trade system in the energy bill.

    instead of credit derivatives or oil futures or mortgage-backed CDOs, the new game in town, the next bubble, is in carbon credits — a booming trillion- dollar market that barely even exists yet, but will if the Democratic Party that it gave $4,452,585 to in the last election manages to push into existence a groundbreaking new commodities bubble, disguised as an “environmental plan,” called cap-and-trade. The new carbon-credit market is a virtual repeat of the commodities-market casino that’s been kind to Goldman, except it has one delicious new wrinkle: If the plan goes forward as expected, the rise in prices will be government-mandated. Goldman won’t even have to rig the game. It will be rigged in advance.

    By the way, Goldman stock has TRIPLED since November.

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