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