Oil Prices Being Pushed Ever Higher By Manipulating Oil Futures Trading

05/25/2011 11:50 am ET
  • Raymond J. Learsy Author, 'Ruminations on the Distortion of Oil Prices and Crony Capitalism'

As readers of these blogs know, I don't buy the oil patch pitch about skyrocketing oil prices being the result of "free market" forces and nothing more. Rather, prices are being manipulated by OPEC with the help of the "oiligopoly", the oil industry and its K Street hires who use their oil patch millions to propagandize and exert enormous influence on government (see "OPEC Agonistes," January 29). Now comes a series of seemingly unrelated events that reinforce this scenario. Scratch away all the economic babble and oil patch price propaganda, and you'll likely find that the oil futures market itself is being manipulated to artificially raise prices. Consider this:

• U.S. crude oil stocks last month, excluding the oil stored in the Strategic Petroleum Reserve, stood at 335,101,000 barrels, up more than 10 percent from the 302,629,000 barrels reported in March 2005.

• Oil Movements, a consulting company based in Halifax, England, reports that OPEC shipments in the four weeks prior to March 25 fell 2 percent, to 24.8 million barrels (far below the vaunted 30 million barrels OPEC claims as its upper limit, a level its producers are forever "straining" to reach). The drop in shipments was led by a decline in westbound loadings of almost 8 percent, far greater than any disruption related to Nigerian production problems, which were broadly blamed for earlier price jumps.

• Ocean tanker rates are sinking fast as a result of new tanker capacity combined with a drop-off in oil loadings. The net result is lower oil shipping costs, which also point to an abundance of available supply and would ordinarily be reflected in lower prices.

• The price of oil closed last week at over $66 per barrel, compared to around $55 per barrel a year earlier, when stocks were lower and ocean shipping costs were significantly higher.

• On March 28, the Conference Board's reading of U.S. consumer sentiment jumped to a near four-year high of 107.2 from the previous month's 102.7. That very same day, the price of oil futures shot up by $2.18 per barrel, to $66/bbl plus, an unusually large one-day price move.

So we know that the market was well supplied with oil stocks in March, OPEC had ample spare capacity, and delivery capabilities were not strained, as evidenced by the drop-off in shipping rates. Why then did an already high oil price take yet another jump on March 28, a gain it's held onto since then at prices approaching Katrina levels?

As I noted in my January 15 blog, "A Funny Thing Happened On the Way to The Gas Pump," the market price of oil is fixed in minute-by-minute trading of oil futures contracts on the floor of the New York Mercantile Exchange or its equivalents in London, Singapore, and elsewhere, and now in electronic trading as well. The trading is, for the most part, opaque, and the identity of those originating trades can easily be kept secret by using straw men or by operating through blind accounts. The anonymity lends itself to manipulation of the futures markets if someone has the means and the desire.

And who might that someone be? Back on December 12, 2004, after a slight, and to then-OPEC president Ali al-Naimi of Saudi Arabia, inappropriate, fallback in prices, al-Naimi declared to the Arab News, for all to hear and read: "Watch what happens tomorrow. I tell you prices will go up tomorrow." And on the appointed day, after some unusual gyrations, prices did indeed go up. For al-Naimi to put his high-profile and carefully nurtured reputation on the line with such a prediction, he had to have known that either he or his agents at Saudi Aramco, or OPEC or its agents, stood ready to manipulate the oil market. Which begs the question, when before and since have OPEC and its agents tampered with the oil futures markets? How many times have the markets been manipulated and to what extent have oil prices been distorted?

It's only logical to conclude, based on events past and present, that the oil futures markets are being played with by an entity that commands the very considerable resources needed to distort a market of such vast dimensions. What else could explain last week's puzzling price movements in which oil jumped some $5 a barrel during the course of the weeks trading, an increase, by the way, that totes up to about $150 million additional income per day for OPEC. Certainly OPEC, with the billions of dollars it has lifted from consumers' pockets, has the resources to ante up for this cooked game. All that's needed to make the scam work is an occasional news story or public relations cover to set off a finely orchestrated buying panic (see my March 2 blog, "Oil Price Panic Crescendo"). Civil strife in Nigeria, destroyed pipelines in Iraq, sabotage attempts in Saudi Arabia, hurricanes on the U.S. Gulf Coast, attacks on shipping lanes, Iranian bluster, and so on -- all are good for a big fat price jump.

And now the brazen "oiligopoly" leaps to take advantage of a new dimension, the acquiescence of consumers!

Given the ample and readily available supplies in place and the already dizzying price levels, what besides that day's surprising jump in consumer confidence could explain the March 28 price spike? Those with their hands on the throttle of the market must have rejoiced to see a docile consuming public shrugging off the outrageous oil price levels as neither a determining nor detrimental factor in its perception of the economy. So, then, why not take the price to the next level?

And, of course, our buddies at OPEC well know that a price spike like that of March 28 will bring the hedge funds piling in, causing prices to generate their own momentum.

Were our government not so beholden to the oil patch, maybe, just maybe, someone at some level would pay attention. Too bad no one in the current administration will even raise an eyebrow.