"How Goldman Sachs Created the Food Crisis "

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Ok, I want to understand what you are saying, so I am not challenge you. I am asking the question for to understand how the market of futures make the (future) spot price. To learn.

If Goldman Sach have the more market share of (Index fund/derivative)
and this fund always roll over to the future,(no delivery) then this big money on the swap/deriviative can move the price of the real commodity/underlying to keep going up, up, up. Is this right?

 

below is the reality of contango trades:

http://en.wikipedia.org/wiki/Oil-storage_trade

The oil-storage trade is a trading strategy where oil tank owners and companies that lease storage buy oil for immediate delivery and hold it in their storage tanks, then sell contracts for future delivery at a higher price. When delivery dates approach, they close out existing contracts and sell new ones for future delivery of the same oil. The oil never moves out of storage. Trading in this fashion is only successful if the forward market is in "contango", that is if the price of oil in the future also known as forward prices are higher than current prices or spot prices. Storing oil became big business in 2008 and 2009,[1] with many participants - including Wall Street giants such as Morgan Stanley, Goldman Sachs or Citicorp - turning sizeable profits simply by sitting on tanks of oil.[2]

It has been estimated that one in twelve of the largest oil tankers are being used for the storage, rather than transportation of oil,[3] and that if lined up end to end, the tankers would stretch out for 26 miles.



January 13, 2010
Wall Street Scrambles its "Contango Convoy" to Capitalize on Higher Oil Demand
By Don Miller, Associate Editor, Money Morning
A 26-mile-long line of idled oil tankers, enough to blockade the English Channel, are firing up their engines and jockeying for position in a race to cash in on the bone-chilling deep-freeze plaguing the North America, Europe, and Asia.

The supertankers, each of which can hold over 2 million barrels of oil, are steaming "all ahead full" to deliver their stores of crude, heating oil and other distillates to the United States.

Their clients - which include several huge Wall Street investment firms - are eager to unwind what's become known as the oil storage trade.



Since late 2008, Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM) and Morgan Stanley (NYSE: MS) and other investors have been accumulating oil and putting it in storage on huge tanker ships.

The tankers were then docked at locations around the world, mostly in the Gulf of Mexico and in Europe, according to a Bloomberg News report, and waited for demand, and oil prices, to go up.

Morgan Stanley, for example, has spent hundreds of millions of dollars to buy and lease offshore storage tanks in New Jersey near New York Harbor, along with oil and gas fields elsewhere.

The banks are maneuvering to take advantage of what oil traders call the "contango effect," which occurs when long-term prices are significantly higher than the current deliverable value.

Contango has been present in the heating oil market since late 2008, providing an incentive for companies to hold rather than sell their oil.

The storage trade is profitable as long as the spread between energy contracts exceeds ship rental, insurance and financing costs.

So what are big investment banks doing dabbling in the oil business?

"For some time now oil has been both a commodity and a financial asset," Dr. Kent Moors, the executive managing partner of Risk Management Associates International LLP and a regular contributor to Money Morning, said in an interview. "Banks can make profits on the spread between wet barrels and futures, futures and options, and new trading platforms will create more new ways to make money in oil."

In other words, the oil gambit is another potential profit center for investment banks struggling to recover from the biggest credit crisis in 70 years.

The laws of supply and demand are pretty clear - buy low when demand is low and sell high when demand is high. But, as usual, it's not quite that simple.


Record Cold Spurs Energy Prices
A relentless surge of cold weather that slammed nearly every country in the Northern Hemisphere, is disrupting travel, threatening crops and driving energy and commodity prices higher.

In the United States, snow flurries stretched as far south as Naples, Florida as below-zero temperatures spread over two-thirds of the country spurring demand for heating oil and natural gas.

Frigid temperatures in the United States are expected to boost the country's heating demand to 21% above normal, with demand in the Northeast - which consumes about four-fifths of U.S heating oil - 11% above average levels, Bloomberg reported.

The increase in demand has the energy complex on the rise across the board. Oil prices rose to a 14-month high of $83.52 in New York trading last week, and heating oil prices are hovering around $2.20 a gallon, their highest levels since mid-October.

And that's where contango comes into play: As the current price for heating oil rises, it becomes less profitable to store and more profitable to sell.

Now that the U.S. cold snap has spiked demand for heating oil and other distillates, raising prices along with it, the tankers are headed back to the Northeast, the trade Web site HeatingOil.com reports, carrying with them potential profits.

But it's not as simple as it looks, Dr. Moors said.

Oil traders are required to settle their accounts daily, answering margin calls on long and short positions if the market moves against them. Their survival is based largely on overnight credit from banks, where they take short-term loans until the market moves in their favor.

But when the recent credit crunch hit, the banks closed the capital spigot and a lot of traders went under, Moors explained. And just like a foreclosure on a house, the banks end up owning the rights to the contracts of oil.

In fact, many of the banks roll over the oil contracts on a monthly basis for liquidity reasons, meaning not all of the oil the banks have in storage was purchased as far back as 2008, when oil traded in the low $30's. In fact, some of it was obtained at much higher prices.


Profits Shrink With Spreads
There's another complication for oil owners that makes the floating storage trade risky.

The spread between the spot price of oil and future delivery has been shrinking as prices increase. A year ago, the spread between the first and sixth Brent crude-oil contracts traded on the London-based Intercontinental Exchange Futures Europe exchange was 23%. Now, it's 4%. The spread all the way out to January 2011 is only $7 and there is certainly no guarantee oil prices will be that high for sellers then.

The contango spread for heating oil shrank to a low of $2 this week from about $18 a ton in December as greater demand for heating oil has increased current prices.

Another factor is lease and crew costs. The cost of leasing a tanker runs $40,212 a day now, according to the median estimate in a Bloomberg survey of 15 analysts, traders and shipbrokers.

As frigid temperatures persist in the United States and Europe, more cargoes may move out of storage making it cheaper to store oil afloat, but with contango spreads tightening, it spells reduced demand for 26 miles of oil tankers.

Also, the profit dynamic in the oil business has changed, Moors said, to favor so-called downstream oil refiners over upstream (or integrated) oil companies like Exxon Mobile (NYSE: XOM) or Royal Dutch Shell (ADR NYSE: RDS.A, RDS.B), Moors explained.

In reaction to overseas competition and lower prices in 2008, U.S. refineries cut production by 8-14%. Now operating with limited capacity as demand increases, refineries can raise prices more than upstream producers.

As demand increases, the refineries will draw down existing stockpiles, while refining the new oil into heating oil, gasoline and other distillates at higher profit margins

It was one thing to store oil when crude was below $40 and future months were much higher. Risk factors are much higher now, and it looks like the oil storage trade will soon be unwound.

For investors looking to profit from the cold snap, as well as longer term, Moors favors Valero Energy Corp. (NYSE: VLO) as a likely candidate to benefit from spiraling demand. Moors points out that Valero has recently increased the efficiency of its distribution channels by opening new gas stations around the country to sell its gasoline, compressing the delivery network and increasing profit margins.

 

So???

Yes, contango became very large in 2009 when market declined to 30 $ and then proceeded to shrink toward backwardation when it climbed back to 100 $ lately. Those articles are right and contrary to the former one...

 

you're smart!!!



U.S. sues big oil traders for 2008 manipulation
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EmailPrint..By Joshua Schneyer and Timothy Gardner Joshua Schneyer And Timothy Gardner – 1 hr 11 mins ago
NEW YORK/WASHINGTON (Reuters) – Regulators launched one of the biggest ever crackdowns on oil price manipulation on Tuesday, suing two well-known traders and two trading firms owned by Norwegian billionaire John Fredriksen for allegedly making $50 million by squeezing markets in 2008.

The Commodity Futures Trading Commission (CFTC) said traders James Dyer of Oklahoma's Parnon Energy, and Nick Wildgoose of Europe-based Arcadia Energy, amassed large physical positions at a key U.S. trading hub to create the impression of tight supplies that would boost oil prices.

Later they dumped those barrels back onto the market, causing prices to crash and racking up profits from short positions they had accrued in futures markets, the suit said.

"Defendants conducted a manipulative cycle, driving the price of WTI (crude) to artificial highs and then back down, to make unlawful profits," the lawsuit filed in New York said.

While the civil suit comes after three years of heightened scrutiny into oil price speculation by the CFTC, it also arrives at a time when President Barack Obama is seeking to reassure Americans he is trying to curb high U.S. gasoline prices and ensure they aren't subject to manipulation.

[ For complete coverage of politics and policy, go to Yahoo! Politics ]


The suit names two traders familiar to U.S. oil market veterans, who recall Dyer and Wildgoose from their days as high-flying traders at BP Plc in the early 2000s, when the British oil giant's trading practices were under scrutiny due to its large ownership of oil tanks at Cushing, Oklahoma, the delivery point for U.S. oil futures.

BP was hit with a record $2.5 million fine by the New York Mercantile Exchange in 2003 for alleged U.S. oil market manipulation, which it paid without admitting any wrongdoing. That case did not include any allegations of misconduct by Dyer or Wildgoose.

Both Parnon and Arcadia are controlled by shipping magnate Fredriksen, who was born in Norway but is based in Cyprus, and whose $10.7 billion fortune placed him at number 72 in the latest Forbes list of the world's billionaires.

The lawsuit says that the CFTC may seek damages of as much as triple the monetary gains derived from the illicit trading violations, among other potential fines and injunctions. If the CFTC won damages of $150 million it would match the second-largest fine in the agency's history.

A CFTC spokesman declined comment on the specific damages it would seek in the suit. In the past, the CFTC has had a hard time winning manipulation cases, although U.S. financial reforms last year gave it broader powers to get tough.

While the trading strategy itself focused mainly on oil futures' price spreads, or time spreads, rather than outright prices of crude, the alleged scheme occurred in a year when global oil prices experienced their largest swings ever.

The CFTC said the traders aborted the trading strategy after April 2008, when they learned of regulators' investigations. Just months later U.S. oil prices surged to a record $147 a barrel, then crashed to nearly $30 a barrel by the end of the year.

Sought for comment, officials at Arcadia and Parnon did not return phone calls. Wildgoose, Dyer and Fredriksen were not immediately reachable.

LOSS LEADER

Using positions in physical markets -- and even making a loss in physical trading -- to gain profits in derivative markets is not an uncommon phenomenon in oil markets.

The CFTC explained that the traders' "repeated conduct lead to at least a physical WTI trading loss of over $15 million. However, the artificial spread prices that were created as a result of Parnon/Arcadia's physical trading created profits of over $50 million in their WTI Derivative positions."

In the early 2000s, oil market trading plays known as "squeezes" were commonplace on both sides of the Atlantic, and BP was known as one of the most aggressive traders, using its control of important physical assets like the Forties pipeline that transports Europe's benchmark Brent crude, and the tanks that store crude at Cushing for leverage on paper positions.

And although the plays have rarely been successfully prosecuted by regulators, they have diminished in U.S. markets amid years of heightened scrutiny and high-profile investigations since the collapse of Enron.

"It feels like a blast from the past," said a veteran U.S. oil trader who requested anonymity.

A LOT OF MONEY TO BE MADE

In September 2007, according to CFTC suit, Dyer said in an email to other Parnon/Arcadia traders that there was a "s***load of money to be made" in creating the appearance that available stocks of crude at Cushing, Oklahoma -- the NYMEX futures delivery hub -- were low, a move that would cause prompt oil prices to rise.

As traders bid up oil for immediate delivery on fears of a shortage, Dyer and Wildgoose would then take a short position in near-term futures contracts, by selling them and acquiring oil contracts for delivery further in the future, CFTC said.

They would then gain profits by dumping large volumes of physical supplies back onto the market, ending the perception of a short-term "shortage," and causing oil futures spreads to collapse as premiums for prompt crude vanished.

The trading duo named in the lawsuit executed a manipulative strategy by amassing "a sufficient quantity of physical WTI to be delivered the next month at Cushing to dominate and control WTI supply even though they had no commercial need for crude oil," the CFTC said.

The scheme worked in January and March 2008, but later failed in April, CFTC said, as prices rose by almost $20 a barrel toward $120 over the course of that month. Prices barely paused from then until they hit an all-time high in July.

FREDRIKSEN EMPIRE

Parnon, headquartered in Oklahoma, owns at least 3 million barrels of storage facilities at Cushing. London-based Arcadia is a major global oil trading firm, which typically markets about 800,000 barrels a day of crude and product around the world.

Both are controlled by Fredriksen's Farahead Holdings, based in Cyprus. Fredriksen's energy empire, which also includes top oil tanker operator Frontline, liquefied natural gas company Golar and offshore driller Seadrill, has hired away several traders who once worked at BP, including Parnon's current CEO, Paul Adams.

Arcadia itself, years before Fredriksen bought it from Japanese trading house Mitsui, was sued by U.S. refiner TOSCO in 2000 for allegedly executing a "squeeze" on European Brent crude with other conspirators, although it settled out of court for an undisclosed sum, without admitting wrongdoing.

Volatility in commodity prices has renewed calls for the CFTC to crack down on speculators in oil markets, with some lawmakers calling on the commission to immediately impose position limits.

CFTC first began stepping up its monitoring of U.S. oil trading in early 2008.

According to the Commodity Exchange Act, manipulation or an attempt to manipulate the price of physical commodities or futures on exchanges like NYMEX are illegal, and distortions in futures spreads that are deemed to have been caused by such trading are also considered violations.

(Reporting by Ayesha Rascoe, Christopher Doering, Tom Doggett in Washington, Jeffrey Kerr, David Sheppard and Joshua Schneyer in New York and Robert Campbell in Mexico City; editing by Jonathan Leff)

 

An interesting thread on this subject from Nuclearphynance:

http://www.nuclearphynance.com/Show Post.aspx?PostIDKey=151364