How the oil market is being manipulated

Discussion in 'Economics' started by walter4, Jun 2, 2008.

  1. Have a look at this article:

    "Many traders have moved to the unregulated over-the-counter exchanges that do not require companies like ExxonMobil or Goldman Sachs & Co. to disclose information about trades. "The lack of information on prices and large positions in OTC markets makes it difficult in many instances, if not impossible in practice, to determine whether traders have manipulated crude oil price," said Tyson Slocum, research director at Public Citizen[..]"

    "At the peak of June trading there were close to 450,000 open contracts but the NYMEX allows traders to "roll" open contracts to longer months WITHOUT PENALTY and by the close of the June contracts, less than 30,000 contracts (30M barrels) were actually finalized for delivery. The other 420M barrels that were, at some point, contracted to be delivered in June, were "rolled" into July, August, Sept.. contracts[..]

    Notice how there are 378,974 barrels "ordered" for July and 91,509 for Aug and 94,177 for Sept and 49,177 for Oct. I will tell you for a fact, right now, that on June 24th (close of July trading) there will be LESS than 40,000 contracts accepted for delivery. All but 40M of the now 378M barrels that could be delivered to the US PER THE EXISTING CONTRACTS will be cancelled by these evil manipulative bastards in oder to create an artificial shortage of oil each month while driving up the apparent demand for the next month by rolling the contracts forward.

    That’s how the scam works."
  2. This is one way. Their are many others, too (like 'faking' inventory reports to show depots, tankers and other storage facilities are empty, when in fact, they're full of oil), which regulators are now only becoming intimately familiar with as large multi-national corporations who depend on stable (and preferable lower) energy prices begin to bark orders at the government or else.

    If the government doesn't act to crack down on free market disrupting 'games' that speculators are playing, retirees of automakers, trucking firms, airlines and even public employees will lose their pension, current workers will be laid off in even larger numbers, and the government tax revenue will shrink further.

    These 'games' are threatening the very security and financial security of the U.S.

    By the way, Phil Davis is not only consistently right on his market opinions and investment theses, he's also a man of integrity.
  3. Haha What a load of BS. And those 40,000 contracts get settled WHERE exactly? At $80? After all the speculators are out surely the price what collapse to the 'real' level?

    Good ole' Phil and his newsletter magically omit that unpleasant fact.
  4. If thats true why aren't you selling contracts just before expiration at $130 or so and delivering the $80 oil? You should be getting 2nd and 3rd mortgages to take advantage of this oppurtunity.

  5. You don't seem to be getting it. It's not about the 40,000. It's about the 348,000 that are getting rolled.

    QUOTE: "Just ponder that those 378,974 contracts were traded on the NYMEX today 425,099 times. That’s a churn rate of 115%! The net change in price was 1% and the net change in open interest was less than 1%. What would you think of a stock or option contract where the entire float turned over in one day? This is what goes on EVERY SINGLE DAY at the NYMEX.

    425,099,000 barrels of oil were traded today, readily available to any trader who wants them delivered in July, with another 136,725,000 August barrels traded and another 73,297,000 September delivery contracts written yet in not one of those months will more than 42M barrels ever be delivered because that is the transfer capacity at Cushing, OK.

    So the ENTIRE thing is a joke. People are ordering barrels they don’t want with contracts written for a place that will never accept deliver AND, if anything actually happens to disrupt supply, there is a loophole called "Force Majeure" which allows the contracts to be cancelled by the shipper due to "supply distruptions" so they are not even buying insurance! That’s right, the entire arguement that these contracts are priced high to insure supply is totally false as ANY ACTUAL SUPPLY DISRUPTION WOULD VOID THE CONTRACTS!"

    "[..]The 30M barrels of oil that were actually accepted for delivery in July set someone back $4Bn, that sounds like a lot until you realize that that $4Bn locked in a price increase of $25 a barrel during the month of May x 85Mb a day worldwide or $65Bn bonus dollars paid to the same people who are churning oil contracts in the pits.

    What if you had 15 shares of IBM at $100 and the price of the last trade on June 24th will set the price you can sell IBM for in July. What if you could buy that last contract for $150 and that would let you sell the ones you are already holding for $150. You would spend $50 extra for a single contract but would collect $50 more on the 15 you have for a net profit of $7,450!

    Would you do it? Do you know anyone who would? Do you think no one would?

    That’s how the NYMEX works. Those 30M barrels that are "accepted" at the contract close determine the price of the 85M barrels PER day that are delivered for the 31 days of May. That’s 2,635 barrels over 30 or 1/87th, that’s what it costs to manipulate the markets."
  6. Force Majeure doesn't void the contracts, it extends the time they have to delivery the physical commodity. It will usually cause a an increase in the prices. See what happened when they declared a force majuere on Nat Gas after Katrina.

  7. and all it took was a Bush in the Whitehouse and a Cheney there too to cover things up....

    hey, what's that expression? "4 more years"
  8. So why doesn't somebody come in and simply take advantage of those inflated oil prices? Surely, if the 'real' price is closer to $80 than $120 somebody could simply increase production and take advantage of the risk free arbitrage that presents itself here to the naked eye and simply burn all those evil speculators? Why don't the oil companies not simply hit all the bids on the NYMEX?

    I only hear all this manipulation BS when prices go up. What about August 2006 when managed futures funds were shorting CL from $75 to $55. That wasn't "manipulation" was it? It's only "manipulation" when prices go up?

    Markets are a necessary evil in order to determine efficient allocation of goods and capital and they do cut both ways.
  9. 1) The exchanges are a risk transfer mechanism, not a delivery/merchandising facility.

    2) Speculators operate on the long AND short side of the market. Prices don't collapse because "longs" are rolling forward nor do prices spike because "shorts" are also rolling forward.
  10. Daal


    couldnt agree more. what these conspiracies guys dont get is if ipod futures were trading at $1000 per ipod, apple would COMPLETLY STOP SELLING ipods in the real world and focus on the futures lemmings who are pushing the price, they would short and take delivery all year long, calendar traders would not be able to hold the price, plus the calendar guys will figure out that once the lemmings are out its a buyers market and they can pull back their bids to get bigger discounts
    #10     Jun 3, 2008