CFTC Investigation Roils the Oilpatch

The dramatic decline today in the price of crude oil (USO-AMEX) might be the first act in a drama that plays out over the next several months.

The big money crowd on Wall Street is whispering that an ongoing probe will snare high profile energy traders, hedge funds and government officials from both sides of the aisle. This could get uglier than today's dramatic puke in energy prices. If my sources are on the money, There Will Be Blood by the time this brewing scandal runs its course:

The U.S. Commodity Futures Trading Commission (CFTC or Commission) today announced a number of initiatives to increase transparency of the energy futures markets. The measures will expand the amount and quality of information received from energy traders to further the integrity and oversight of our nation’s futures markets. The recent dramatic increases in the price of crude oil traded on futures exchanges make these efforts paramount. The implementation of today’s measures will improve oversight of the energy futures markets to ensure they reflect fundamental economic forces of supply and demand, free of manipulation and fraud.

Conspiracy theory? Not so fast, charts don't lie. More downside ahead?

USO Oil ETF 5-day Chart

But something clearly did not add up today in the weekly inventory report:

``The report just doesn’t seem to make sense,’’ said Christopher Edmonds, the managing principal of FIG Partners Energy Research & Capital Group in Atlanta. ``I can’t help but wonder if next week there will be a reaction and we’ll get a large inventory build.’’ Bloomberg

Perhaps there is more to the oil price decline than meets the eye.  In any case, regulators are pressing ahead:

“The CFTC currently conducts surveillance of the crude oil markets, in part, using detailed trading data provided by the FSA pursuant to a 2006 information-sharing pact. The agreement announced today will enhance the amount and quality of the information the CFTC receives regarding crude oil trading in the UK and will enhance the agency’s already vigorous surveillance activity.”

The agreement includes:

1. Immediately implementing expanded information-sharing to provide the CFTC with daily large trader positions in the UK WTI crude oil contract;

2. Extending trader information sharing to provide crude oil large trader position data for all contract months in the WTI contract, not just the nearby months;

3. A near-term commitment to enhance trader information to permit more detailed identification of market end users;

4. A near-term commitment to provide improved data formatting so trading information can be seamlessly integrated into the CFTC’s surveillance system; and

5. In addition to the established position management program that FSA currently requires of ICE Futures Europe, ICE Futures Europe will notify the CFTC when traders exceed position accountability levels, as established by U.S. designated contract markets, for WTI crude oil contracts.

In December of 2007, the agency’s Division of Enforcement launched a nationwide crude oil investigation into practices surrounding the purchase, transportation, storage, and trading of crude oil and related derivative contracts. Although the Commission ordinarily conducts enforcement investigations on a confidential basis, the Commission is taking the extraordinary step of disclosing this investigation because of today’s unprecedented market conditions. The specifics of the ongoing investigation remain confidential. All Commission enforcement inquiries are focused on ensuring that the markets are properly policed for manipulation and abusive practices.

The regulators job might be akin to herding cats, and could certainly drive trading activity to some of the emerging exchanges outside the U.S. But the language would seem to indicate that this is anything but routine, or boilerplate;

The Acting Chairman and the Commissioners commented:

“In addition to the CFTC’s ongoing examination of the role of fundamental economic forces and new investors in the recent commodity market price increases, the agency continues to pursue one of its primary missions – to deter, detect, and punish futures market manipulation.”

Stay tuned, this one could make Brian Hunter’s escapade look like amateur hour and Syriana merely a window to the real world machinations in the energy markets.

We should know soon enough, but lower prices will be a welcome event, corruption, conspiracy, manipulation, or not.

But everyone is looking for answers, including the Fast Money panel tonight:

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UPDATE JUNE 5TH: Crude Oil Rips After Regulators Show Their Hand

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“Syriana" Trailer

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CFTC Announces Multiple Energy Market Initiatives
Commodity Futures Trading Commission

Oil Is Steady After Losing More Than $4 as Fuel Demand Declines
Bloomberg

If you think it’s the “index speculators”...
Interfluidity

The Geopolitics of $130 Oil
George Friedman, Stratfor
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