Oil prices ripped this afternoon after Congressman Bart Stupak commented about the ongoing CFTC investigations in a press conference, and later on CNBC. Stupak threw cold water on persistent rumors that Goldman Sachs (GS-NYSE) and Morgan Stanley (MS-NYSE) were under the microscope, which had traders scrambling over fears of what the CFTC's investigation would uncover:
June 1st Confidential or not, it is not good news Goldman Sachs or Morgan Stanley, who have built large commodity trading segments, and have much more to lose from a slowdown in commodity trading than their Wall Street rivals.
Stupaks comments were rather wish-washy, however:
"It's not that they are doing anything criminally illegal...they are taking advantage where no one has ever looked before and when someone does take a look, there may be something illegal." Dow Jones
Stupak denied on CNBC that regulators are specifically targeting the bulge bracket brokers, but claims traders are "gaming the system". Yes, the recent weakness in oil was only partly about the dollar or weak demand. Traders in the know had built positions betting the probes would turn into something bigger, and with no smoking gun traders covered shorts, lighting the candle that propelled oil to one of its biggest daily gains in history. Stupak seems to be hedging , have we heard the end of the story?
The CFTC's International Energy Market Manipulation conference is scheduled for next week
Senior enforcement officials from around the world with responsibility for prosecuting manipulative conduct affecting prices of energy commodities and derivatives are gathering for two days in Washington, DC for the Commodity Futures Trading Commission’s (CFTC) second annual international manipulation conference.CFTC June 5th Press Release
In light of recent increases in prices in today’s energy markets, and the multiple energy market initiatives recently announced by the CFTC (Release: 5503-08), this year’s conference will focus on global trading in the energy markets. The meeting is open only to regulators.
“In this time of rising energy prices and increasing cross-border and cross-market activity in the commodity markets, it is essential that international regulators coordinate to ensure that they are working as efficiently and effectively as possible to detect and deter manipulation in the global energy markets. Since no global regulator exists, it is critical that the international sister agencies continue cooperation and coordination to ensure market integrity.” said CFTC Director of Enforcement Gregory Mocek.
The June 11-12 market manipulation conference brings together international regulators to share their experiences and observations of trends and successful techniques used to detect, deter and prosecute illegal activity. The conference and the related energy market initiatives reflect the CFTC’s continued efforts to work with fellow regulators to enhance oversight of the energy futures markets worldwide.
This year’s event is a follow-up to the highly-successful enforcement conference hosted by the CFTC’s Division of Enforcement in October 2007 (Release: 5400-07). At the end of last year’s event, participants agreed that future meetings were essential to continue discussion on how the international regulatory community could work collectively to combat commodity market manipulation and other market abuses, and to share information and expertise. Through these discussions the CFTC seeks to ensure that commodity markets are receiving adequate attention by regulators worldwide to effectively detect and deter manipulation and other market abuse that may affect energy prices.
Energy markets are not my department, hopefully rumors of a commodity blog penned by a popular energy trader are on the mark, and will soon give layman a source to punch up on the web.
But until there are new sources, you can always turn to old reliables. The Financial Times is the home of blogging royalty, and a piece by Lord Desai lays out the case for additional oversight of the fast money pits:
How large is the speculator activity? The total open interest – the number of open or outstanding contracts for which an individual is obliged to the exchange because that individual has not yet made an actual contract delivery – in the 2008 contracts on May 21 was 849.472 contracts, which equals 849m barrels, or nearly 10 times the daily crude oil production. The daily volume in the 2008 contracts on May 21 was 657.391 contracts, equivalent to 657m barrels or nearly 8 times the daily crude oil production.
This is a problem that requires immediate action. The best way to counter speculation is to make it less profitable. Step one is to protect the regular traders in the real oil economy (those who intend to close their positions by making or taking delivery of oil) and charge them a lower margin than those who have no intention of plying the oil trade. The purely financial traders must be made to pay a proper price for their speculation. This can be done simply by increasing the margin that they have to put down to trade as open interest, from the current 7 per cent to about 50 per cent. FT
Higher margin requirements might take some of the fluff out of the price of oil, which Congressman Stupak pegged at $30 to $40 a barrel. But ‘ole Bart does not comes across as the sharpest knife in the drawer, and betting that slow footed regulators can find a smoking gun was probably wishful thinking.
But Stupak’s comments today on CNBC were seemingly contradictory from his press conference two hours earlier, when he was quoted as saying:
“As our investigation goes further, we are really starting to unravel quite a web of - I am trying to say collusion, but I wouldn’t quite go that far - but you can certainly see manipulation of the price in places we’ve never seen before,” he said.
Asked if the biggest trading houses were Morgan Stanley and Goldman Sachs, Stupak said: “Yes, it’s them,” again stressing the lack of any evidence of illegal behavior. Dow Jones
Was he misquoted? Did Paulson muzzle him after the press conference and before his CNBC appearance? Strange...but for now its....
Game on, as oil recovers recent lost ground.
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Dramatic Move for Crude Today
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Representative Stupak claimed regulators are looking at “macro” issues, not “micro” ie. company specific.
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Comments:
I disagree almost entirely with the FT’s analysis of the speculator position, above, and especially disagree with what they are trying to imply.
This is an enormously complex subject but what’s happened is that real world users have been forced into the near month contracts to secure actually oil cargoes, while speculators--contrary to popular myth--have been driven out of the front part of the curve. This is why you see surging volume in the front and near months, and hugely contracting open interest in the front and near months.
The shift, from speculators to real users in the front months is a direct result of the disappearance of spare capacity in global supply.
I fully recognize my analysis is totally contrary to the mythologies spouted here in the States. The CFTC data does nto support the mythology, it supports my analysis.
I wonder: do people realize the ETF’s like USO were sellers of front month contracts on Friday, and rolling into August’s? I wonder: do people realize only an idiot speculates in front month oil when you are only 15 days to expiry? I wonder: if people really believe that front and near month oil is 40 bucks over-valued, then Western Oil Producers from BP to OXY to Suncor can put on party hats, and sell production to all the “crazy speculators” who are buying front and near month oil at super-inflated prices? I wonder: do people realize that the pension funds and commodity indexers are not even in front or near month oil--but are often out at least 6 months to 2 years? I wonder, do people realize the CFTC data shows nearly zero support for the idea that speculators were covering shorts in front month oil in such a way that moved the market this week?
Finally, you will rarely hear any talk of the other globally contracts in petroleum that are even more closely tied to real-time, real-world demand. In particular, the ICE contract for GASOIL--which is the go-to contract for global demand for diesel. This contract’s ability to confirm or diverge from action in Brent and NYMEX is positively uncanny. Bottom line: this contract has been roaring the last 12 months as world demand for diesel--real demand--has soared.
Hope some of this is of interest to you. Let me finish by saying a few controversial things. First, the majority of floor traders in the oil markets never had, and still do not have a handle on the global situation with the geo-politics, and in particular, the geology of oil. This is also true of the CEO’s of the oil companies. Again, I only refer to the record of commentary over the past 7 years from these two groups. As a class, they are clueless. Rex Tillerson of XOM will even tell you as such--he will say he has no idea why oil prices are where they are and its not his job to figure that out. That’s almost a direct quote. There are exceptions however, and there are Floor Guys who are intellectually curious and have indeed figured alot of this out. And there are a few CEO’s like the head of TOT and Shell who “get it.”
Anyone who gets it is bullish.
But again, one can have a spirited conversation about all of this that can go on for days. And, I myself studiously avoid taking any ideological or intractable positions. However, the following is one of my firm views: https://twitter.com/gregormacdonald/statuses/806547234
I can appreciate the liquidity the guys on the floor have traditionally provided, but I think many of them would agree they are not experts in the geo-politics.
There has been some chatter that the demise of the pits and move electronic trading has impacted short term moves, and much of the material trading takes place on the OTC markets and through various derivatives.
I too, avoid ideological or intractable positions but it certainly fun trying to make sense of this amazingly complex subject.
I think some of the activity in the copper market is more suspect than oil, but with record moves in many commodity prices, given what is going on in OECD countries, I am struggling to understand the price action.
Thanks again, and i just tried to add the oildrum on twitter, but of course it is not working.
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