The Speculative Market Of Oil

Gas went from two-something a gallon to well over four dollars and approaching five, now it is back down under two dollars again. What a crazy roller-coaster ride it has been in the last couple of years for the cost of oil and its most beloved byproduct, gasoline. While I believe the recent decline in price has a lot to do with the falling demand of a sagging economy, it certainly does not tell the entire story. It wasn't so much that so much demand more than doubled the price at one time, but speculators looking to make a quick billion or two...all at the expense of the millions who fill up their cars.

From CBS:

To understand what happened to the price of oil, you first have to understand the way it's traded. For years it has been bought and sold on something called the commodities futures market. At the New York Mercantile Exchange, it's traded alongside cotton and coffee, copper and steel by brokers who buy and sell contracts to deliver those goods at a certain price at some date in the future.

It was created so that farmers could gauge what their unharvested crops would be worth months in advance, so that factories could lock in the best price for raw materials, and airlines could manage their fuel costs. But more than a year ago those markets started to behave erratically. And when oil doubled to more than $147 a barrel, no one was more suspicious than Dan Gilligan.

So we have a quick history about why Wall Street has futures trading, but no explanation to why it gets abused the way it does, yet. And Dan had already told 60 Minutes all about this speculative business back when oil was at its peak last summer. Then those in the market denied everything Dan said. Then this happened in September.

If anyone had any doubts, they were dispelled a few days after that hearing when the price of oil jumped $25 in a single day. That day was Sept. 22.

Michael Greenberger, a former director of trading for the U.S. Commodity Futures Trading Commission, the federal agency that oversees oil futures, says there were no supply disruptions that could have justified such a big increase.

Of course there is nothing out there to do that, unless we went to war with Iran and they blocked the Straits of Hormuz. Anyways, here comes the big academia investigation:

A recent report out of MIT, analyzing world oil production and consumption, also concluded that the basic fundamentals of supply and demand could not have been responsible for last year's run-up in oil prices. And Michael Masters says the U.S. Department of Energy's own statistics show that if the markets had been working properly, the price of oil should have been going down, not up.

"From quarter four of '07 until the second quarter of '08 the EIA, the Energy Information Administration, said that supply went up, worldwide supply went up. And worldwide demand went down. So you have supply going up and demand going down, which generally means the price is going down," Masters told Kroft.

"And this was the period of the spike," Kroft noted.

So, drumroll please, that means the increases were artificially created. So who is at fault? Well, that would include all sorts of financial entities, such as investment banks, hedge funds, commodities traders and the like. They were all looking for quick profits and found an avenue to do so in the oil futures market. So, I'll leave you with a sad joke from the interview, which pretty much sums things up.

Yes," Gilligan said. "I tease people sometimes that, you know, people say, 'Well, who's the largest oil company in America?' And they'll always say, 'Well, Exxon Mobil or Chevron, or BP.' But I'll say, 'No. Morgan Stanley.'"

Sad but true.

Optiver Holdings, First Of Many Oil Speculators Charged

While the Commodity Futures Trading Commission denies that oil speculators are a significant factor in the surging price of oil, they have been going after speculators with a vengeance lately. Today they snagged their first by charging three top executives of Optiver Holdings. Apparently they were successfully manipulating the price so that they bought big at the end of the day to drive prices up and then sold big to make it go down again.

From CNN:

The Commodity Futures Trading Commission accused Optiver Holding, two of its subsidiaries and three employees with manipulation and attempted manipulation of crude oil, heating oil and gasoline futures on the New York Mercantile Exchange.

"Optiver traders amassed large trading positions, then conducted trades in such a way to bully and hammer the markets," CFTC Acting Chairman Walt Lukken said at a press conference. "These charges go to the heart of the CFTC's core mission of detecting and rooting out illegal manipulation of the markets."

In May, under the backdrop of record oil prices and calls from legislators to crack down on speculative oil trading and market manipulation, the CFTC announced a wide-ranging probe into oil price manipulation. The agency says it has dozens of investigations ongoing.

The complaint filed Thursday names Bastiaan van Kempen, chief executive; Christopher Dowson, a head trader; and Randal Meijer, head of trading at an Optiver subsidiary.

Of course there are plenty of factors that are used to determine the price of oil. A hurricane, a war, supply and demand....they're all important. Yet Optiver is just one of many speculators out there (I'm fully confident, as is the CFTC, that there will be more illegalities found) messing with the market and ultimately the price of a gallon of gas. All of them should be prosecuted to the fullest extent of the law, like all the corporate crooks out there.

$2 Gas By August?

On a sultry late June day in 2008, the price for a gallon of gas is to be found in the range of $4-$5 and even more for Diesel. Prices have risen astronomically in the last year to two and on a steady uptick since the beginning of George Bush's ascent to the White House. Individuals and government agencies alike have had to drastically reconfigure their budgets due to the cost of fuel. Well there is an answer to the mess, but only if Congress has the guts to do something about the main reason behind the exponential rise, oil speculators.

From MarketWatch:

Testifying to the House Energy and Commerce Committee, Michael Masters of Masters Capital Management said that the price of oil would quickly drop closer to its marginal cost of around $65 to $75 a barrel, about half the current $135.

Fadel Gheit of Oppenheimer & Co., Edward Krapels of Energy Security Analysis and Roger Diwan of PFC Energy Consultants agreed with Masters' assessment at a hearing on proposed legislation to limit speculation in futures markets.

Krapels said that it wouldn't even take 30 days to drive prices lower, as fund managers quickly liquidated their positions in futures markets.

"Record oil prices are inflated by speculation and not justified by market fundamentals," according to Gheit. "Based on supply and demand fundamentals, crude-oil prices should not be above $60 per barrel."

Sure, there was opposition to this view, but what would you expect from the majority of speculators? Why would you give up a good thing...and no, morality does not figure into the minds of brute capitalists. It just doesn't happen, the competition is too fierce. The long-term rise in oil has been steadily going up and $60 a barrel is far more reasonable and makes sense for where the price should be. Prices will rise as demand increases and the supplies begin to taper off, but the volatility is market-based and not due to real-world conditions in oil fields and worldwide demand.

Congressman Dingell sounded willing to consider capping the speculators and putting an end to their heartless practices in the oil market. If a bill could get out of committee, onto the floor and passed in both Houses, the President could be pressured to act before the August recess. Then again, pigs may fly and the Earth could spin the other way, but there is no harm in mentioning that there is another way.

Oil Traders: "Trust Us," Congressional Aides: "Yeah, Right"

Washington would be far more dull if there wasn't splashes of humor intertwined in the lobbying done by the very wealthy. No group is more powerful than the collective interests on Wall Street and the best product out there for them is oil, especially with a barrel of oil surpassing $140 and gas prices surging past $4. With the American public screaming for something to be done, Congress (controlled by Dems) is looking to do something and oil traders are in their sights. Of course those with the oil money doth protest, so let's take a look at their strategy of "not me."

From The Washington Post:

Representatives of Goldman Sachs and Morgan Stanley, along with the trade associations for hedge funds and other financial groups, have lobbied the offices of key legislators, briefed senior staffers on committees that oversee pivotal parts of the energy markets and distributed research materials explaining their view about oil and how it's traded.

In a pair of lengthy and sometimes testy closed-door sessions in the Senate last week, executives from Goldman Sachs and Morgan Stanley, two of Wall Street's largest investment banks, made the case that their multibillion-dollar investments in energy contracts have not led to higher oil prices. Rather, they told Democratic staff members of the Energy and Natural Resources Committee that the trades allow international markets to operate efficiently and that the run-up in oil prices results not from speculation but from actual imbalances of supply and demand.

But the executives were met with skepticism and occasional hostility. "Spare us your lecture about supply and demand," one of the Democratic aides said, abruptly cutting off one of the executives, according to a staff member in the room.

Another aide at the meetings warned the executives that no matter what arguments they muster, it would be hard to prevent Congress from acting. Referring to a vote earlier this year to impose new mileage standards on automobile makers, the aide said, "At 90 bucks a barrel, Congress rolled the autos for the first time in 30 years -- is it too much to think that Congress will impose more restrictions on you if oil goes to $150 dollars a barrel?"

Wow, those aides are tough talkers, but can their bosses act decisively so that Wall Street is effectively regulated? The public has had enough of the status quo and the ridiculous profits that are made by a select few in the energy market.

Supply and demand certainly has an effect on the market price, but without the speculative practices of Wall Street, oil would be at the most half of what it is trading for right now. Oil companies and those that work the contracts are making way too much money at the public's expense.

There's More To The Price Of Oil Than Just Supply And Demand

The Commodities Futures Trading Commission has taken the extraordinary step of coming out with an investigation of oil traders who are suspected of manipulating the market in order to make unconscionable amounts of money at the expense of the American and even world economies. Now it is great that high oil prices get people to switch to mass transit, but if the CFTC can prove there was criminal wrongdoing, the bastards involved should face a long, long prison terms.

From The Washington Post:

The CFTC said its investigation started in December, before this latest surge in prices but after an earlier surge that took oil prices over $90 a barrel.

Congress has been pressing the CFTC to take tougher action to stop what lawmakers call "speculation" -- which is not illegal -- and possible unlawful manipulation of oil markets. Some lawmakers have suggested that the commission discourage speculation by increasing margin requirements so that traders would have to put up more cash to buy positions on commodity markets.

The CFTC said that in addition to the investigation, it had reached agreements with British and European regulators to share more information about oil markets. It also said it would take steps to increase transparency by getting more information from index traders and other financial players.

It was unclear whether the commission's announcements were a reaction to congressional pressure, but they were praised by many lawmakers. Rep. Edward J. Markey (D-Mass.) said he was pleased, adding that "the CFTC must vigorously pursue all leads to protect the American people from market manipulation during a time of record prices at the pump."

The real question is whether if/when the CFTC finds wrong-doing, will Congress take the appropriate actions and deal the oil industry the crushing blow that it deserves? ExxonMobil, ChevronTexaco and the rest have been figuratively raping America right along with their trader friends on Wall Street. Enough is enough, the people demand action and simply talking about how bad they are won't cut it.