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Raymond J. Learsy

Raymond J. Learsy

Posted: July 8, 2008 03:40 PM

High Oil Prices: Is That The 800 Pound Russian Bear Dancing In The Trading Pits


OPEC, speculation in commodities market, hedge funds, the falling dollar, peak oil theorists, all play a part in the current run up in oil prices. Yet one of the major players has escaped both scrutiny and careful analysis. Consider two items that were news this past month:

- Russia's new president Dimitri A. Medvedev, speaking to a group of foreign journalists made clear his and Russia's posture that the " United States is in no shape to give advice". He then went on to categorically declare that America is "essentially in a depression."

- A few weeks before Alexei Miller, chief executive officer of Gazprom made an eye opening forecast. Mr. Miller predicted on June 10th that oil prices would rise to $250 a barrel in the near future. Gazprom is Russia's largest company. It controls 16 percent of the world's gas reserves and 116 billion in oil and oil equivalent ranking it only behind Saudi Arabia and Iran as the world largest holder of oil reserves.

Now why would the head of Russia's largest and most prestigious company put his reputation and his company's reputation on the line by making such a seemingly rash prediction. Certainly predictions of ever higher prices serve the interests of oil producers but usually they are left to friendly analysts in the field. Could it be that Mr. Miller is absolutely sanguine about the issue, knowing the price game is cooked.

And President Medvedev making comments about an America in depression whose advice is no longer welcome by an ascendant Russia, itself having become the largest energy exporter in the world, stoking an economy that is now the fastest growing by far among the G-8. This, by a nation that still views America with grave suspicion as succinctly expressed only recently in an interview (May 30, Paris "le Monde") with Vladamir Putin the former President of Russia and KGB colonel and Medvedev's sponsor and mentor, as a "frightening monster".

For Russia this moment verges on the triumphal. A nation ascendant in benefiting handsomely from the fortuitous rise of energy prices. An America sinking into recession if not depression, the cost of energy, especially oil, strangling its economy and in turn its influence on the world stage. The shifts in world order are so profound, so unexpected one needs wonder whether the word fortuitous is appropriate relating to the price of oil. In essence the price of oil has done for Russia what the cold war Kremlin was unable to achieve given all its missiles, tanks and mind numbing divisions of men and armor. Could it be that the Russians through Russia's vast $500 billion in foreign currency reserves, or Gazprom itself, or perhaps even the KGB ,or any combination or variation thereof is gaming the oil futures market to Russia's great advantage and to America's and all oil importing nation's great detriment given the vast expenditures in armaments it would have taken to achieve an analogous result. Gaming the oil futures market would be chicken feed by comparison to the armaments cost needed to achieve the same relative status.

Unconvinced it could/does happen? Let me cite some examples and commentary. In a post here in entitled "The Trade That Brought Us $100 Barrel Oil Teaches Us to Be Afraid , Very Afraid" 1.7.08 focuses on the single trade that moved the price from $99.53/bbl to $100 on January 2 2008. That trade was for one contract representing 1000 barrels and required a deposit margin of $6750. Thus with that miniscule investment, and as long as that price was preeminent on the trading board, all oil produced or shipped reflected that increased price value or a one days increase of some $40 million given the 85 million barrels loaded and shipped each day. How's that for leverage? And then to help matters along the hedge funds stand ready to pitch in being intrinsically trend players, happy to pile on and sustain any trend real or creative.

In another post ("Oil at $111 a Barrel: We Are Being Sovereignly Screwed!", 3.17.08),
The Sovereign Wealth Funds of the UAE, Kuwait, Qatar,Libyia, Algeria and of course Saudi Arabia were cited as having enormous wealth tied up in their sovereign funds with the means and certainly the incentive to game the futures markets of virtual paper barrels on commodities exchanges to support the price of wet barrels being produced in their home market. The Brazilian Sovereign Wealth Fund was cited because it has openly declared it will use its Sovereign Wealth Fund to support an ideal valuation of its currency the "real," given Brazil's export oriented economy. Here, clearly and candidly is a wealth fund declaring that its currency holdings would be used to pursue a policy in its specific national interest. This in glaring contrast to other wealth funds who are submerged in murky opaqueness without the slightest inclination toward transparency.

Are the Russians gaming the futures markets for oil? They are not innocents nor incompetent. When it comes to using elbows powered by their resources they will do what is necessary. Ask the Ukranians, ask the Europeans. Gaming the futures markets on the London or Singapore commodity exchanges or through electronic trading (please remember the markets offshore have a direct immediate impact on other markets throughout the world) would be a simple matter for the Russians as long as no one catches them out. Here one needs to remember that the Russian leadership is formed by KGB veterans.

What can be done? Given the evolution of pricing on our commodity exchanges and the paucity of oversight by our CFTC this is a job well beyond the CFTC's capabilities. It is Congress that must act. This administration, so in the thrall of the oil industry, whose modus operandi on matters of manipulation of oil prices is to do little or nothing whether it is confronting OPEC or putting teeth into the CFTC. It is Congress, in the interests of national security and rational markets, that must insist we engage the resources of the CIA to put a clear and bright light on this issue. Anything less would be a dereliction of responsibility.