CFTC Investigating Whether Big Traders Lied About Oil Inventories

Wow, what happened? The CFTC went from being a lapdog to developing teeth. A little late, now that oil prices are on a forced march downward, but the commission could have backed off as oil became less of a front-burner issue. (Of course, your cynical blogger wonders if there was a risk that this story might get to the media, completely undercutting its credibility). Note that the drift of the investigation is that inventories may have been underreported, which would lead to higher prices.

No names yet, but this looks to be a serious investigation. Admittedly, this is consistent the with the thrust the CFTC said it would take earlier, looking into tankers and storage, but it looks like they are proceeding in a thorough, disciplined manner.

I have a buddy who was the DA in a pretty rough and tumble town (Bridgeport, CT). He said that the FBI wasn’t composed of the brightest bulbs, but they often got their man because they were relentless. People in the private sector like to look down on regulators, but many are very able, and like the FBI, they can be dogged as well.

From the Wall Street Journal:

Commodity-market regulators are investigating whether energy-market players are injecting false data into the marketplace to influence perceptions about crude-oil supply and demand…

Among other things, regulators are concerned that companies may be reporting inventory levels that benefit their own trading positions but that may not be accurate….

Unexpected drops in oil inventories reported each Wednesday by the U.S. Energy Information Administration can spark price spikes on the main oil futures benchmark on the New York Mercantile Exchange. A company could theoretically underreport barrels in its tanks, for example, at a key hub to suggest oil is scarcer than it really is, and then sell its physical oil at a premium when oil prices jump on misleading news.

Another concern is whether companies conduct some physical oil sales and purchases solely to influence short-term pricing on oil futures markets….

The agency has become more active in soliciting and acting on leads from traders and experts in physical energy handling, according to people familiar with the CFTC’s operations.

Yves here, In case you missed it, that’s an invitation to become a whistleblower, for those of you in the know.

Among the periods the agency is examining, these people say, is a rapid shift in the structure of oil markets in July 2007. Price relationships flipped in a way that was extremely profitable for traders who may have had close knowledge of continuing and rapid drain-off in oil inventories. Oil for near-term delivery had been selling at a discount to oil to be delivered months and years into the future. Suddenly, oil for immediate delivery became much more expensive when a glut of oil at a key hub at Cushing, Okla. rapidly drained…..

Yves here. Cushing would be the easiest place to manipulate prices….quoting an earlier Bloomberg story:

In terms of oil storage, regulators will likely focus on Cushing, Oklahoma, the delivery point for crude oil sold on the New York futures market, said Kyle Cooper, director of research at IAF Advisors in Houston. Stockpiles at Cushing amounted to 21.3 million barrels of oil as of last week, 6.8 percent of the nation’s total, according to the Energy Department.

“Cushing has always been a bone of contention because of the relatively small size and the influence it has on a market as big as crude oil,” Cooper said. “If you have a few players who have a significant influence over the market, then they have the ability to influence prices.”

Back to the Wall Street Journal:

It is illegal to report false data to the EIA. One issue is how much the EIA vets the information it receives; the CFTC is interested in doing more thorough examinations of inventory data that it suspects may be inaccurate….

The CFTC recently hired outside consultants to help it dive into the ins and outs of physical oil shipping and terminals. They are hosting intensive boot camps for its enforcement attorneys to give them a road map of who owns key infrastructure and how they use it. The idea is to better grasp where, if a trader wanted to manipulate prices, the markets might be vulnerable

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  1. Dave Raithel

    Mmmmmmmmmmm…Ben Stein. Yeah, I now know how truly whacked he is; I don’t even bother with “Ben Stein Watch” anymore -I caught him being interviewed by Brian Lamb at C-Span a week or so ago, and I thought to myself: My God (not that I believe there is one, it’s a figure of speech), How or Why did I ever give this man credibility as a simple grey cloth-coat Republican who told tales out of class about subterfuge and skullduggery? Wait, I remember… IT’S BECAUSE HE’S ONE OF THEM. HE GREW UP WITH THEM AND WENT TO SCHOOL WITH THEM. SURE, HE’S A CLOWN, BUT WHAT IS THE PURPOSE OF A JESTER??????

  2. Anonymous

    I always wonder about efficient markets and damned lies; we seem to live in a very unregulated era where information has less and less value; to wit:

    It’s Hard to Thaw a Frozen Market

    Market prices have been drained of their informational value and thus don’t much reflect the “wisdom of crowds,” as they would under normal circumstances. Investors are instead flocking to the safest of assets, like Treasury bills.

  3. Anonymous

    To sound like I just put on my tin foil conspiracy hat, Karl Rove knows that the only way McCain’s going to win is to make the election a referendum on values and the future of the supreme court and not the economy.

    Bush is taking Iraq off the table via talks of withdrawal and so the next obvious objective is to do something/anything on the oil front.

    Threats of investigation would probably be enough to keep any mischief in line (if there is any), a little help from the Saudis and no more saber-rattling against Iran would do a lot to deflate oil.

    Next thing to watch on my paranoia list…the jobs report on Friday. Will birth-death adjustments be reasonable? Will unemployment miraculously fall?

    Welcome to the era of truthiness.

  4. a

    “Inventories may have been underreported…” Well if that’s true, Krugman’s argument that the price rise was not due to speculation, falls apart. Mind you, post hoc, the importance of speculation looks kinda obvious in any case. Let’s remark that Yves was one (of the few?) who said the price rise in oil was caused by speculation.

  5. ndk

    Let’s remark that Yves was one (of the few?) who said the price rise in oil was caused by speculation.

    For which she certainly deserves her due. It was a gutsy call.

    I don’t think you can fault Krugman, though, if a key data point upon which his argument relied turns out to have been falsified. The CFTC may well make OFHEO look diligent in the end.

  6. Yves Smith


    Thanks for remembering, but actually I was very careful to say that the runup was well nigh impossible to explain solely based on fundamentals. That is, supply and demand may have played a part, but there was a speculative element as well. And yes, I was seen as off beam by Peak Oil types who took that formulation to be tantamount to Peak Oil denial, Serious Economists (pretty sure I lost some as readers, since I no longer get links from a couple who used to point to stuff here) and Moe Gamble.

  7. Richard Kline

    Serious Economists _do_ seem to run in packs. Like as for other herd animals, there’s risk diffusion when it turns out you were wrong about what was sneaking up in the tall grass. A typical academics’ strategy.

    Seriously, while there was room to make arguments pro and con for sure, the speculative element in commodity run-ups, most especially in oil, was sufficiently obvious that only trained minds could block it out. I found the discussions of this earlier this year, both here at NC and elsewhere, as a classic case of how a wealth of knowledge is worth rather less than a dram of sense.

  8. Anonymous

    To be fair, Krugman, et. al. are constrained in their latitude for public conjecture without the smoking gun in hand. We commentors are not so constrained. So anonymous is wrong. Who cares.

    On the other hand, the economics profession seems to not understand the dynamics of short term price discovery in the real world markets. Traders understand the impulse and market hysteresis aspects of non-equilibrium price setting. Who cares if the market eventually finds the euilibrium level.

    Economists do, but by then, the trader (speculator)has walked away with a pocket full of cash. The investment banks and hedge funds have been blowing out the stops, up and down, all day, every day, forever.

  9. Anonymous

    “Let’s remark that Yves was one (of the few?) who said the price rise in oil was caused by speculation.”

    I heard many voices suggesting speculation was the prime reason for the run-up. I thought it was clear as well, but I’m not running the country. The fact Paulson and Bernanke steadfastly ignored reality is the real story. If Yves can figure this out, why is Bernanke in the dark? Why isn’t Yves running the economy?

    I somehow doubt Bernanke is up at 1:11 am thinking about the economy.

  10. Anonymous

    Yves, congrats on your correct call re speculation in oil driving prices and possibly rigged inventory numbers accomplishing the same price spike.

    On The Oil Drum I stated (when oil reached about $141 per bbl) that some of the run up in price was due to speculation. I had no proof except my past experience with bubbles and various economists, yourself included, that were saying the same thing.

    I received no end of criticisim for my call and I stopped posting at TOD because even the board monitor was dissing me. TOD is basically a bunch of cheerleaders not only for peak oil, but more especially peak oil NOW. BTW, I do believe that oil is a finite resource and that it will eventually run out.

    More to the point…If I were you I would not be concerned about losing Moe Gamble or any economists that buy into peak oil NOW. Many of these people were talking their book and got caught long oil when it plunged. I was short oil and a good payday was my vindication.


  11. Matt Dubuque

    My view on the sudden increased vigilance of the CFTC may differ from the views regularly expressed here in this forum.

    My view of the regulatory situation is that the Fed is pushing extremely hard behind the scenes to acquire extensive jurisdictional powers over SEC turf (because of their pathetic lapses in regulating investment banks such as BS and LEH) and of CFTC turf (because of numerous lapses such as the specific failure described here).

    These horrific failures have led to dramatic systemic events that cannot be repeated.

    As such, I personally view the reaction of the CFTC as them trying to justify their existence and to prevent their necessary absorption into more competent regulatory authorities.

    Matt Dubuque

  12. Richmond Rambler

    Scarce resources: oil, truth, time. The volatile combination of all three confused economists such as Krugman and many others. Kudos, Yves, for the subtle, accurate commentary.

  13. Anonymous

    My daughter tells me that philosophy is more of a science than economics, and all though that makes me cough and wheeze and laugh hysterically, I think she has a point! Nonetheless, I think most sciences are very open to retrospective analysis.

  14. Freude Bud

    I don’t understand the congrats on speculation. The folks who report the numbers on inventories and shipping would be classified as “commercials,” not “non-commercials,” or “speculators.” It is one thing to say that there are actors who attempted to manipulate the market and another to say that “speculation” is the cause. Clearly, “speculation” isn’t the cause being investigated by the CFTC.

    People who look down on regulators always end up crying for their help. To wit: the entire financial industry today.

  15. Anonymous

    It should be fun to see the CFTC finally go after BP.

    British Petroleum own most of the delivery market storage (Cushing). They have been manipulating that market for years.

    The Government has known about it since they investigated BP for propane price fixing.

    The problem? BP has been pushing the prices down to get crude cheaper to sell it at higher prices later and get more money for storing crude.

  16. a

    “I don’t understand the congrats on speculation.”

    I look at the graph of the price of oil, and I say speculative bubble. You may differ, but that’s my honest (unbiased) opinion. Unbiased, in the sense I had no money on either horse and was honestly unsure at the time when Yves was making the call. Now maybe I’ll retract that in two weeks if the price of oil shoots back to 140, but that’s my honest opinion (and I’ll emphasize *opinion*) today.

    On the other hand, Krugman’s argument against speculation depended on the premise that inventories were tight. If inventories weren’t tight but just misreported, his argument would seem to fall down. Or am I missing something?

  17. mxq

    Yves has, more importantly , pointed out that the possibility of manipulation is merely a function of the opaque/obfuscatory state of the information discovery process. (not inclusive, but namely: here, here, here, and here).

    Markets are supposed to diffuse this sort of thing…ironically, they are probably contributing to this cluster f.

  18. Freude Bud

    Yes, the possibility of manipulation is a function of the opaque/obfuscatory state of the information discovery process, which is a problem almost entirely found in the cash market, not the futures market. Which is the point of the article, the CFTC is going after people who are players in the cash market and who, evidently, the CFTC believes are attempting to manipulate the markets by falsifying their inventory and shipping reports. (Or so I infer.)

    And, yes, Yves should be congratulated for pointing out the obfuscatory and opaque nature of the cash market in oil, but not for going after “speculation”–whatever that might mean, and if she really, in fact, did.

  19. Mikey

    Good call Yves.

    Also, I wonder what happened to the U.S. and this concept of “good faith” dealings? I’m 42, so I’m not that old, but there’s this gaming of the system now that seems utterly pervasive. Either that or I’m not as naive anymore.

  20. leftback

    a is correct – it is all in the charts. once anything goes parabolic you know that normal market dynamics have been suspended. this is something that all traders now, but for some reason Serious Economists are sometimes blind to these things.

    You can usually tell that you are correct when you state the obvious and are attacked wildly. So it is not surprising that Yves was treated so rudely.

    I had the same reaction in various places when I criticized Krugman’s rather silly posts – although a smart economist, he obviously had NO idea of the extent of hedge fund positions or the way that futures markets can be manipulated by small perturbations of the data. BTW, I like his columns and think he is a terrific writer.

    A bubble is a bubble, and they all end the same way, with a 50% haircut. Nikkei, NASDAQ, Shanghai, crude. So that means we will see $75 oil, probably in the spring. Ya listenin’ there, T Boone?

  21. Juan

    Please pardon if I’m repeating myself but have been “covering” this for so long I lose track.

    On basis of its Marathon case, the CFTC has not been unaware of attempted reporting manipulation(s) through the physical trade. From Aug 2007:
    Washington, D.C. – The U.S. Commodity Futures Trading Commission (CFTC) today announced the issuance of an order filing and simultaneously settling charges against Marathon Petroleum Company (MPC), a subsidiary of Marathon Oil Corporation, based in Findlay, Ohio, for attempting to manipulate a price of spot cash West Texas Intermediate (WTI) crude oil delivered at Cushing, Oklahoma on November 26, 2003, by attempting to influence downward the Platts market assessment for spot cash WTI for that day.

    Then, more directly related to Cushing, change in forward curve and inventory levels, this Oct 2007 WSJ article by Ann Davis:
    By the end of last year [2006], independent oil-storage firms around the world were 97% full, according to Sanford Bernstein analysts. Two tank owners in Cushing say that by this April they were turning potential customers away. Some traders even leased ocean tankers to use for storage, although that cost twice as much, or more, than land-based storage. Through it all, U.S. consumption was relatively flat. Over the summer, OPEC ministers pointed to high oil inventories in the U.S. as a reason to keep a lid on production.

    Krugman’s error, though, had more to do with reliance upon theory which presupposed physical trade to be price determinant; also to say that he (unconsciously) demanded reality conform to theory — not uncommon and obviates need for sufficient research esp when become commonplace stories seem to validate.

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