A Few
Speculators Dominate Vast Market for Oil Trading
Here is a second article CONFIRMING that
indeed there has been international “price fixing” and “price manipulation.”
This article is more conformation when we took exception with both Rush
Limbaugh and Sean Hannity on the cause of high oil
prices. To Sean we wrote a lengthy letter
in which we cited a number of cases including in 1964 when two men managed to
corner the entire world silver market. These two men who
made millions as they drove the
By David Cho
Thursday, August 21, 2008; Page A01
Regulators had long classified a private Swiss
energy conglomerate called Vitol as a trader that primarily helped industrial
firms that needed oil to run their businesses.
But when the Commodity Futures Trading Commission examined Vitol's
books last month, it found that the firm was in fact more of a speculator,
holding oil contracts as a profit-making investment rather than a means of
lining up the actual delivery of fuel. Even more surprising to the
commodities markets was the massive size of Vitol's portfolio -- at one point in
July, the firm held 11 percent of all the oil contracts on the regulated
New York Mercantile Exchange.
The discovery revealed how an individual financial
player (One
small company) had gained enormous sway over the oil market without the
knowledge of regulators. Other CFTC data showed that a significant
amount of trading activity was concentrated in the hands of just a few
speculators. (Surprise,
surprise)
The CFTC, which learned about the nature of Vitol's activities
only after making an unusual request for data from the firm, now reports that
financial firms speculating for their clients (Who
might these gentlemen be?) or for themselves
account for about 81 percent of the oil contracts on NYMEX, a far
bigger share than had previously been stated by the agency. That figure may rise in coming weeks as the CFTC checks the status of other
big traders.
Some lawmakers have blamed these firms for the
volatility of oil prices, including the tremendous run-up that peaked earlier
in the summer.
"It is now evident that speculators in the energy
futures markets play a much larger role than previously thought, and it is now
even harder to accept the agency's laughable assertion that excessive
speculation has not contributed to rising energy prices," said Rep. John D. Dingell (D-Mich.).
He added that it was "difficult to comprehend how the CFTC would allow a
trader" to acquire such a large oil inventory "and not scrutinize
this position any sooner."
The CFTC, which refrains from naming specific
traders in its reports, did not publicly identify Vitol.
The agency's report showed only the size of the
holdings of an unnamed trader. Vitol's identity as that trader was confirmed by
two industry sources with direct knowledge of the matter.
CFTC documents show Vitol was one of the most
active traders of oil on NYMEX as prices reached record levels. By June 6, for
instance, Vitol had acquired a huge holding in oil contracts, betting prices
would rise. The contracts were
equal to 57.7 million barrels of oil -- about three times the amount the
The documents do not say how much Vitol put down to
acquire this position, but under NYMEX rules, the down payment could have been
as little as $1 billion, with the company borrowing the rest.
The biggest players on the commodity exchanges often operate
as "swap dealers" (Wheeler dealers who will do anything to make a buck)
who primarily invest on behalf of hedge funds, wealthy individuals and pension
funds, allowing these investors to enjoy returns without having to buy an
actual contract for oil or other goods. Some dealers also manage commodity
trading for commercial firms.
To build up the vast holdings this practice
entails, some swap dealers have maneuvered behind the scenes, exploiting their
political influence and gaps in oversight to gain exemptions from regulatory
limits and permission to set up new, unregulated
markets. Many big traders are active not only on NYMEX but also on
private and overseas markets beyond the CFTC's
purview. These openings have given the firms nearly unfettered access to the
trading of vital goods, including oil, cotton and corn. (Add rice here)
Using swap dealers as middlemen, (So that legal
companies will not get in trouble for these questionable deals) investment
funds have poured into the commodity markets, raising their holdings to $260
billion this year from $13 billion in 2003. During that same period, the price
of crude oil rose unabated every year.
CFTC data show that at the end of July, just four
swap dealers held one-third of all NYMEX oil contracts that bet prices would
increase. Dealers make trades that forecast prices will either rise or fall.
Energy analysts say these data are evidence of the concentration of power in
the markets.
CFTC leaders have argued that speculators are not
influencing commodities' prices. If any new information arises during the
agency's examination of swap dealer activity, officials said they would report
it to Congress.
"To date, the CFTC has found that supply and
demand fundamentals offer the best explanation for the systematic rise in oil
prices," CFTC spokesman R. David Gary said, reading a statement that had
been crafted by agency officials. "Regardless of their classification . .
. the CFTC's market surveillance group scrutinizes
daily the positions of all large traders, both commercial and non-commercial,
to guard against market manipulation."
Victoria Dix, a spokeswoman for Vitol, declined to
answer questions. The firm, through Dix, released a statement that stated only
that it had not been contacted by the CFTC about the reclassification of its
business and that its trading status remained unchanged. CFTC officials said
they do not typically contact firms that are reclassified.
On its Web site, the firm says it has $100 billion
a year in revenue and describes its thriving global energy-trading business.
For most of the past century, regulators put limits
on financial actors to prevent them from dominating commodity exchanges, which
were much smaller than the bond or stock markets. Only commercial operations,
such as farms, airlines, manufacturers and the middlemen that handle their
trading activities, were allowed to buy nearly unlimited quantities. The goal
was to allow these businesses to minimize the effect of price swings.
The first major change to this regulatory framework
occurred in 1991, when Goldman Sachs, through a subsidiary called J. Aron, argued that it should be granted the same exemption
given to commercial traders because its business of buying commodities on
behalf of investors was similar to the middlemen who broker commodity
transactions for commercial firms.
The CFTC granted this request. More exemptions soon
followed, including one to the Houston-based energy trader Enron.
"When the CFTC granted the 1991 hedging
exemption to J. Aron (a division of Goldman Sachs),
it signaled a major shift that has since allowed investors to accumulate
enormous positions for purely speculative purposes," said Rep. Bart Stupak (D-Mich.)
Now, he added, "legitimate businesses that hedge and take physical
delivery of oil are being trampled by the speculators who are in the market
purely to make profit."
A second turning point came when Congress passed
the Commodity Futures Modernization Act of 2000. The law formally allowed
investors to trade energy commodities on private electronic platforms outside
the purview of regulators. Critics have called this piece of legislation the
"Enron loophole," saying Enron played a role in crafting it.
In the months after the act was passed, private
electronic trading platforms sprang up across the country, challenging the
dominance of NYMEX.
"Investment banks had been frustrated with the
established exchange because they really were never able to get control of
it," said Michael Greenberger, a law professor at the University of Maryland and a former staff
member at the CFTC.
The most successful of the private platforms was
InterContinental Exchange, or ICE, founded by Goldman Sachs, Morgan Stanley and a few other big brokerages
in 2000. ICE soon opened a trading platform in
The exemptions for swap dealers and the development
of overseas markets allowed big brokerages to open the door for more hedge
funds, pensions and big investors to move into commodities.
In the coming years, commodity investments by funds
could grow to $1 trillion, veteran hedge fund manager Michael Masters said in
testimony before the Senate earlier this year. In an interview, he said this
trend could raise commodity prices for everyone in the coming years and
"have catastrophic economic effects on millions of already stressed
Meanwhile, commodities have been good business for
big Wall Street brokerages. Its commodity trades
helped keep Goldman Sachs profitable during the credit crisis, said Richard Bove, a banking analyst at Ladenburg Thalmann.
"Business is lousy right now,"
In the coming months, swap dealers expect to have
yet another venue for oil speculation. The CFTC has stated it would not stand
in the way of trading
in