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Oil Market Manipulation has Crude Prices Sky High

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It makes no sense. Today's price of oil is $74 a barrel, having retreated these past days from over $80/bbl. This, a price more than 100 percent higher that the $33/bbl touched in February 2009. This, with land storage so filled to the brim that over 30 million barrels are kept in floating storage at sea. As one example, Kuwait's crude oil exports to Japan plunged by 47 percent to less than five million barrels a month. In spite of the summer driving season inventories of gasoline in the United States are rising. Supplies of oil at Cushing, Oklahoma, the delivery point for the New York Mercantile Exchange futures contract are less than 1 percent from their all time high reached in May of this year. Inventories in a 15 state region that includes Illinois rose to 97.7 million bbls/oil earlier this month, the highest ever since data was recorded, beginning in 1980 according to Energy Department Report. The price of crude taken together with the country's jobless rate of 9.6 percent makes no sense at all. Clearly the price of oil has lost all ballast to the dynamic of supply and demand.

This space has repeatedly addressed the machinations of the Organization of the Petroleum Exporting Countries (OPEC), the speculative excess on the commodity exchanges, the manipulated oil trading by the oil producers (please see "BP's Smoking Gun and the Manipulation of Oil Prices" ) and myriad other factors that have made oil prices, and the prices all of us are paying for downstream products such as gasoline, heating oil, diesel and on, an outrageous and indefensible tax on the public's well being (please, I am talking about the price of oil and the price these products and the transfer of billions upon billions of dollars to oil interests. The issue of oil/fossil fuel consumption and its impact on the environment is something else altogether and cannot be solved by making the oil producers and the oil speculators ever richer).

Interestingly an article in the Wall Street Journal blares "Oil Gets a New Dance Partner: Stocks" marveling at the correlation between stock prices and oil prices. Yet, digging a little deeper into the article a much more significant aspect is touched upon. "Oil and stocks are joined up by actual money flows as more fund managers... and so called "algorithmic traders" who trade on technical signals instead of fundamentals. The article goes on to explain "In recent years commodity exchanges have built up their technologies to allow easier access for computer based traders which have become a dominant force in some markets". That traders "tend to do the same thing at the same time not because of the fundamentals rather because there is so much money under management that hey have become the markets." According to another trader quoted in the article, "Whatever is producing this phenomenon is growing in force not waning in force."

For those who doubt that the oil market can/is being manipulated, only last week the CFTC reached a $12 million settlement with ConAgra Trade Group, whom the Commodity Futures Trading Commission (CFTC) accused of purposely executing a trade for an oil futures contract at "a non bona fide price". (Please see New York Times "Ex-Con Agra Unit Settles With U.S. Over Artificial Oil Trade"). In January 2008 a ConAgra instructed a floor trader on the New York Mercantile Exchange to close a spot market futures contract at $100/bbll thereby giving him bragging rights of being the fist to break the $100/bbl barrier (also see "The Trade That Brought Us $100/bbl Oil Teaches Us to Be Afraid, Be Very Afraid"). The basis of the CFTC's action was that the trade was an infraction of the Exchange rule that "prohibits transactions that cause a price to be reported that is not a true and bona fide price." Mr. Scott D. O'Malia, one of the CFTC commissioners made it known that he would have preferred the commission to vote to pursue a case for 'attempted manipulation' rather than the lesser charge.

Well there it is. If ConAgra Trade Group was hit with a $12 million fine because they caused a "non bona fide price level" to be reported, then a strong argument must be made that those "algorithmic traders" responding to technical signals rather than fundamentals, or trading simply because there is so much money under management that they become the market overriding the fundamentals, resulting in trading that has little bearing nor reflect a "true and bona fide price". In doing so are they are breaching the guidelines set forth by the CFTC, replicating in form and spirit the "non bona fide price level" that resulted from ConAgra's trade, except in far greater measure.

Of course, the situation of distorted trading on the commodity exchanges could be contained in large measure if Congress stepped in to restrict participation by computer-based traders. But don't hold your breath. The oil boys would harness their "K" Street lobbying teams, the best that oil money can buy, and combine forces with the Wall Street speculators in order to squelch any effort to bring some rationale, some sanity, some semblance of fair play back to the oil trading pits. The oil interests have the money to do it, and we have a Congress whose election campaigns yearn for the money they can provide and are therefore happily do their bidding. We, in turn as consumers, have no alternative but to pay, pay, pay while the oil interests and the oil speculators gorge themselves with billions of undeserved margins and profits while great swaths of our population are suffering massive economic turmoil.

All this, while our Administration continues to snooze away (please see "The Price of Oil Has Doubled On Obama's Watch--The Time For Action is Now") on this issue core to our economic well-being!Oil