from wsj.com Traders Accused in Oil-Price Plot By DAN STRUMPF And LIAM PLEVEN Three years after launching a probe to determine whether the 2008 oil-market frenzy was fueled by excessive speculation, the U.S. alleged that two traders and their firms operated an international plot to manipulate prices. In a federal-court lawsuit filed Tuesday, the Commodity Futures Trading Commission accused the traders of running a simple, but effective, scheme in early 2008 that reaped more than $50 million. In one of the biggest cases ever pursued by the CFTC in the energy markets, the agency is seeking triple damages and disgorgement of gains, according to the complaint, which could amount to up to $200 million. The CFTC accuses the traders, Nicholas J. Wildgoose and James T. Dyer, who worked for Arcadia Petroleum Ltd., a Swiss commodity-trading firm, and its affiliates, of buying millions of barrels of oil, creating the illusion that supplies were critically low at the nation's central oil hub, Cushing, Okla. That drove up the value of derivatives contracts they already held, the agency says. After pocketing the profits on those derivatives contracts, the complaint alleges, the traders then executed a similar scheme in reverse, dumping the physical oil they had purchased back onto the market and profiting in the derivatives market. The traders continued their scheme from January until April 2008, the CFTC alleges in a civil suit filed in U.S. District Court in New York, ending only when they learned of a CFTC investigation into their conduct. Phone messages left with Arcadia offices in Switzerland and London weren't immediately returned. Arcadia is owned by Farahead Holdings Ltd., a holding company headquartered in Cyprus and owned by Norwegian shipping magnate John Fredriksen. Parnon Energy Inc., an oil-trading firm affiliated with Arcadia that also executed trades in the alleged plan and was named in the lawsuit, as well as an attorney for the defendants, didn't respond to phone messages. Mr. Dyer, reached at his home in Brisbane, Australia, declined to comment. Mr. Wildgoose, of California, couldn't immediately be reached for comment. IntercontinentalExchange and CME Group Inc., which operates the New York Mercantile Exchange, declined to comment. The charges come three weeks after President Barack Obama set up a Justice Department task force designed to "root out any cases of fraud and manipulation in the oil markets," after oil prices soared above $100 a barrel. Oil prices rose 1.9% on Tuesday to close at $99.59 per barrel, and are up 9% this year. The case also comes as the CFTC is considering a new rule aimed at curbing speculation in commodities, a goal of regulators since the 2008 spike that sent crude-oil prices to a record high of $147 a barrel in July. There is still disagreement about what caused the 2008 price spike. Major oil consumers and some Washington lawmakers blame financial speculators for driving prices up, but many traders and analysts argue that supplies became perilously tight. Early in 2008, supplies in Cushing hit their lowest level since 2004, around 15 million barrels, making them especially sensitive to signs of a shortage. Cushing's storage tanks are key because they are the delivery point for the main oil-futures contract traded on the Nymex, the world's most heavily traded oil contract and the benchmark off which much of the world's oil is priced. "The case will likely turn on whether there is enough here that you can infer the causal relationship" or whether the defendants can say there were "others things going on in the market," said attorney Paul Forrester, a partner in the energy practice of Mayer Brown in Chicago, who wasn't involved in the case. In January 2008, Arcadia subsidiaries bought a majority of the West Texas Intermediate oil, the blend used to fulfill Nymex futures contracts, expected to reach Cushing in the following month, the CFTC said. They also placed large bets that February futures would trade at an expanding premium to the March contract. As other traders began to notice that Cushing was due to run low on oil, that bet paid off. Mr. Dyer and Mr. Wildgoose then took positions that would profit on March futures trading at a growing discount to April futures, the CFTC said. When Arcadia began selling its oil, the rush of crude into Cushing deflated the value of the March contract. Arcadia repeated the trade two months later, but stopped when they became aware of the CFTC's investigation, according to the agency. Betting on this gap, called the "calendar spread" or "time spread," is a common trade in the futures market. However, the CFTC alleged that Arcadia "wanted to lull market participants into believing that supply would remain tight; that they would not be selling their physical position." As a result of the scheme, the complaint alleges, the spread between key oil contracts was "artificial" on 12 different dates in January and March of 2008.
Time to regulate physical market. http://www.ft.com/intl/cms/s/0/911b947e-869b-11e0-9d41-00144feabdc0.html#axzz1NN3r4fn8
Wow, what a trade. Make 50 mil, lose 15. Then give to govt another 13. Total is 22 mil. Ain't too shabby.
The articles suggest a "calendar spread" strategy - but if you're long both futures and the underlying physical commodity, that argument doesn't hold water. A "basis" trade or hedging strategy similarly would not hunt. After watching the Frontline special on Stephen Cohen et al - where at least there were FBI wire tapped recordings and cooperating witnesses giving testimony... just not sure how strong this oil price plot case truly is. I guess we'll find out once the indictments are made public. Trying to corner markets is not risk free. Ask the Hunt Brothers. If CME modified the contract spec to a cash settlement indexed on a number of delivery points it would possibly help curb some of this ? It's common knowledge that securing rack space in Cushing, Oklahoma is not a given. Now that the United States is the largest Oil Producer in the world, that Keystone Pipeline would surely help mitigate this type of thing one could opine. Opening up the question for debate...
1) It seems they were long "physical crude" and shorting 3 times as many barrels of CL futures, based on the respective P&L for each side of the trade. Their buying of physical supported the market in the short-term but then maybe they "oversold" the futures, as if front running their sales of physical, which would be expected to really pressure the market instead of trading the futures by themselves. That can explain the loss on the cash-side and the gain on the futures. It resembles a "short Texas Hedge" by the sale of each market simultaneously. 2) "Manipulation" is difficult to prove because they were always at risk with each side of the trade, as long as they had no advance notice of inside information with any major market reports. :eek:
I guess they were long, Nazzdack... "Simultaneously, the defendants established a large long position in WTI futures contracts "with the intention to artificially inflate the value of that position by driving WTI prices higher." However, this trial has a big scapegoating element to me...I am sure Arcadia wasn't the reason was the reason oïl went to 130$. WTI was just part of the big financial buying of commodities when stocks started their plunge and the system almost collapsed...