Why Oil Spiked: Connecting the Dots with Eric Bolling

I have been trying to lay out a thesis explaining what was going on behind the scenes in the energy markets over the past week, although it was largely ignored by the media and bloggers.

It started on May 29th when I ran with a story that no one appreciated at the time:

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.

Kooky? Absolutely, but I ran with it over the next week, intently watching the price of crude, using the Oil ETF (USO-AMEX) as my proxy.

June 1st
Are the financial markets underestimating the ongoing investigation into manipulation in the commodity markets? The recent decline in crude oil (USO-AMEX) might have been, in part, due to the unwinding of speculative long positions. But with financial concerns in control of much of the storage and distribution infrastructure, ongoing investigations are about much more than mere leveraged long positions in the futures markets.

Persistent rumors place a large amount of crude "on the water", ie. in tankers waiting to deliver. Back in the late 1990's I would talk to people in the upper floors ot the World Trade Center who could see tankers loitering outside the Verrazano Narrows, waiting for the right time to make their delivery. And while that is a slight exaggeration, you get the point.

But I digress. On Thursday things really got interesting.

Congressman Bart Stupak started his press conference at 11 AM, briefing the media on the ongoing CFTC investigation.  Apparently Dow Jones ran a story detailing it at 11:33 AM, but it was not really picked up anywhere, outside of the CNN Money website.

While oil gapped higher on the open Thursday morning, a nasty bout of selling shortly before Stupak began at 11 AM left oil prices essentially where they had been 24 hours previous, and up only a little on the day. Energy traders move quickly, and Trichet’s commentary, which was certainly a downer, had barely budged crude several hours into the trading day. Yet every idiot with a blog, and the news media, have been using that as the excuse for Thursday’s move in oil. Wrong.

Stupak’s media escapades were the big story. While it is possible his comments at the 11 AM press conference were taken out of context, he seems to be hedging and cautious over his choice of words:

The chairman of a Congressional energy panel said Thursday that oil and products markets were being “manipulated” by the biggest trading houses in the futures markets, though he said a probe hasn’t uncovered illegal activity.

Bart Stupak, D-Mich., named Goldman Sachs (GS) and Morgan Stanley (MS) as two of the trading houses. He said the U.S. House Energy Oversight Committee hasn’t subpoenaed the banks and is basing its findings on data from the Commodity Futures Trading Commission.

Stupak said initial results of his committee’s investigation into skyrocketing oil and product prices had found loopholes in current laws were allowing the biggest traders in the futures market to “game the system.” He said the committee would hold a hearing to announce full results of the investigation on June 23.

“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.

“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

Trading meandered for roughly the next hour and a half. But Stupak did not seem to possess the smoking gun, and to be frank, few traders on Wall Street fear the regulators at the CFTC, and were not doubt looking to put on positions.

Stupak’s comments were slowly disseminated into the market as the press conference wrapped up, and you can see below how oil traded the remainder of the day and Friday:

Crude Oil ETF (USO--AMEX) 2-day chart

Stupak went on CNBC at 2:02 PM, and energy traders got a first hand look at their adversary, who clearly is out of his league:
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By the time Stupak finished talking to Erin Burnett traders were scrambling to cover shorts, and fresh money was poring in to crude as the market decided that Stupak was a stooge. The reaction to Trichet was mild, but now traders really ripped ‘em higher, no doubt laughing all the way. But they will have to run the gauntlet again next week

On June 11-12th the CFTC will be holding their second annual manipulation conference; let us hope it is more successful than last years gathering. What a joke:

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

You might want to jot June 23rd down on your calendar as well, that is when the CFTC is going to release the results of the investigation Stupak alluded to.

Still, few in the media had it right, at least until Fox Business Network rolled out their best kept secret Friday to break down the action. It seems Eric Bolling is buying into my theory. Yes, Trichet got the ball rolling Thursday, but it was the fumbled investigation that lit the candle in crude:
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Bolling on Fox Busines Network

“I have never seen a spike like this before”

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By Friday morning it was worse. Traders had time to figure out what had happened on Thursday, and we had reports of saber rattling in the middle east to add to the mix. But that is not all.

A high profile call from a Morgan Stanley analyst, whose parent firm is busy defending itself from Stupak’s (non?) allegations, predicted that oil would spike to $150 by Fourth of July. This is less than 24 hours after a member of Congress, who is working with the CFTC, called his firm’s activities into question in a roundabout way:

“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.

If I am not mistaken, Morgan Stanley’s Ole Slorer is not a strategist, or even an E&P analyst. He is an energy services analyst, who normally opines on the day rates of drilling equipment and not the price of oil. Typically energy service analysts use key assumptions, like the price of crude, that are generated by someone in the research department and used firm wide for the sake of consistency. And even if they come up with an independent oil price estimate, when was the last time an energy services analyst made a market moving prediction on the price of crude?

Highly unusual, for sure.
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Ole Slorer...Morgan Stanley

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Morgan Stanley threw fuel on the fire. Yes, the ramp in crude was also fueled by saber rattling in the Middle East, etc, but a strange confluence of events rocked the oil markets this week. Will sellers now come out in droves? Or are we going to hit Morgan Stanley’s $150 estimate.

With the FBI and Justice Department also sniffing around, it is assured the oil pits will remain a slippery place. I am well aware of the demand part of the equation, but there is a lot more to this story than has been divulged, or meets the eye.

Stay tuned, and for extra credit, rent Syriana before trading reopens. Art imitates life in this clip from the movie:.

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Expect oil at $150 a barrel by 4th of July, analyst says
Rocky Mountain News

US Rep Says Probe Uncovers Oil Market Manipulation
Dow Jones/CNN Money

CFTC Investigation Roils the Oilpatch
1440 Wall Street

Commodity Trading Probes Target Wall Street, Organized Crime
1440 Wall Street

Time to Speculate on a Decline in Crude Oil?
1440 Wall Street
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The content contained in this blog represents the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No Positions

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