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Raymond J. Learsy

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Does JPMorgan's Derivatives Fiasco Portend the Collapse of Crude Oil and Gasoline Prices?

Posted: 05/21/2012 8:33 am

According to The Wall Street Journal, JPMorgan's losses on what has been reported as big directional bets on credit derivatives, but never fully disclosed by JPMorgan, could reach $5 billion and counting. Along with credit derivatives and other commodities such as copper JPMorgan Chase is a behemoth trader in crude oil and petroleum products, both as physical product and its financial derivatives. Since April the price of WTI crude on the commodity exchanges has eroded for a plethora of reasons by some 14 percent a barrel from near $105/bbl to just over $91/bbl, a massive decline in short order.

Now I do not know JPMorgan's current oil trading book, nor their positions being held in physical crude oil and derivative futures contracts. But past history shows that JPMorgan is a major player risking hundreds of millions, if not billions, in oil trading positions. JPMorgan has a history not only of massive trading in oil futures but also taking title to enormous volumes of physical product held in shore storage as well in chartered VLCC's to sit for months at a time at anchor at sea (VLCC's-enormous tankers able to hold over 200,000 tons of cargo, some three times the size of the HMS Queen Mary.)

Given past trading practices, JPMorgan may be holding speculative cargoes of crude oil valued in the hundreds of millions of dollars (each ton contains 7.4 barrels of crude x 200,000 tons purchased say at hypothetical level as the recent price of $105/bbl would value such a cargo at $155,400,000. This compared to a current price (close of trading Friday, May 18) of $91/barrel or $134,680,000 plus per diem chartering and holding charges resulting in a paper loss of at least $20,720,000 -- a significant sum but without the current credit derivatives imbroglio, could well have been handled with equanimity by JPMorgan Chase. But that is the point, given the building losses in its other trading operations JPMorgan may not reasonably be able to tolerate further deterioration in value in its proprietary commodity trading positions and one could venture that the pressure to liquidate such positions is mounting, especially as prices erode. The question becomes how large are their crude oil physical and derivative positions, and under how much pressure is JPMorgan now under to liquidate?

JPMorgan has been a major player in pushing the price of oil up in their speculative position taking, prices that have played out in the price of gasoline we are all paying at the pump. Perhaps this is the turnaround moment and JPMorgan's current travails in trading will lead to lower gas prices. Please remember the testimony given by Rex Tillerson, chairman and CEO of ExxonMobil (if ever a personage should know, he should) just a year ago, before a Senate committee, that the then quoted price of $100/barrel incorporated $30-$40/barrel attributable to speculation. JPMorgan was not mentioned but when it comes to oil speculation, JPMorgan is among the leaders of the pack.

One further point: JPMorgan, as a supposed bank holding company has ready access to the Federal Reserve cash window and its diminutive interest rates, in other words, taxpayer money. This, while simultaneously holding Federal Deposit Insurance Corporation (FDIC) secured deposits for which the government is the backstop of last resort. Thus, taxpayers are helping JPMorgan Chase run up the price of oil and gasoline at little cost to JPMorgan and to their enormous profit. Yet should all the trades blow up and the bank collapses the government is left holding the tab. All the while we pay for it a second time at elevated prices for gasoline at the pump.

Lastly, it's the irony of ironies -- this cozy relationship with the Federal Reserve is memorialized by JPMorgan Chase Bank Chairman and CEO Jamie Dimon sitting on the board of the New York Federal Reserve (JPMorgan's Piggy Bank). It is a grotesque symbol of how the Wall Street banks control our government.

Mr. Dimon, sir, out of respect to our waning confidence in government institutions, your resignation from the Fed Board is well past due.

 
 
 

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