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Raymond J. Learsy

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Oil Price Skyrockets 9.36 Percent in Friday's Trading, Supply and Demand. Eh??

Posted: 07/02/2012 11:30 am

Friday saw one of the biggest one-day escalations in the price of oil on the trading exchanges.

The usual crop of soothsayers attributed the increase to news that Europe had taken steps to assist its banks, to the over-hyped -- in a world overflowing with oil -- specter of disruptions in oil markets, and to producers' feverish attempts to catch every sale in the face of the steeply falling price of oil (25 percent in the weeks before Friday's bizarre rebound). Yet these reasons are hardly enough to explain away such a radical one-day jump.

Clearly, other factors were in play. Short covering, of course. But, then again, the shorts were forced into panic mode. But by whom, and why?

Just last week the Commodities Futures Trading Commission (CFTC) imposed a $453 million fine on Barclays Bank for manipulating the LIBOR interest rate, and the investigation is continuing. LIBOR is the interbank interest rate central to global financial markets, along with a $350 trillion market for interest rate swaps and over $10 trillion market of corporate loans which impact everything from floating rate notes to home mortgages to car loans, touching virtually every corner of the world's economy -- much like how the price of oil impacts the price of gasoline, heating oil, diesel and on.

If a bank can manipulate such a vast market, is it not conceivable that a national entity, whose economy is deeply tied to oil prices, might well attempt to bring about an analogous manipulation?

Just two weeks ago Aleksei L. Kudrin, Russia's former minister of finance, responding to ex-KGB operative President Vladimir Putin's boastful comments about the Russian economy, warned that Russia's national budget "could become too vulnerable to a downturn in oil prices." To balance this current year's more modest budget, which does not include President Putin's campaign promises of higher wages, better maternity leave benefits, greatly expanded military spending and on, Russia (one of the world's leading oil producers, along with Saudi Arabia) needs an oil price for its European exports of $117 per barrel or higher, according to Mr. Kurdin. The former minister went on to say that the Kremlin should brace itself for an extended price slump to $60 per barrel or lower.

Back in 2008, as the price of oil was approaching $100 per barrel, a single trader buying one futures contract on the New York Mercantile Exchange (NYMerc) was able to push the price to the $100 level and nab the bragging rights that went with it. He and his then firm, Conagra, were subsequently fined $12 million for making a "non bona-fide trade."

If one trade of one contract can move the markets, would it not be possible that a major player hiding behind a market-moving event such as the positive news on the European debt crisis would use it to hype the commodity exchange trading to its utmost, far beyond a normal commercial reaction? A move of 9.3 percent or $7.27 per barrel in the price of oil is so massive that it is beyond commercial reason. And with 85 million+ barrels of oil consumed throughout the world each day, it is a cost to the world's economies of staggering proportion.

CFTC, now that you have bagged one biggie, how about another!

 

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