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Manipulated Rigged Crude Oil Prices And The Big Bounce

Commodities / Crude Oil Apr 21, 2010 - 06:40 AM GMT

By: Andrew_McKillop


Best Financial Markets Analysis ArticleWorld oil trading mainly concerns "paper oil" contracts traded at a rate vastly higher than actual physical oil production, supply and demand. Paper oil contracts on crude and products cover volumes and quantities at least 60 to 80 times more than actual physical supply and demand. In the case of the USA, where the oil trading system started, the difference is even bigger - usually at least 100 times. The financial players who operate the market, ranging from private investment banks and brokers through commercial banks, hedge funds and high net worth individuals set the scene for price movements, and generate the price spikes and troughs the press and government like to blame on the oil industry, environmentalists and government, or on OPEC.

With the Goldman Sachs crisis, creating serious erosion of its Teflon imagee, attention will shift from GS action in CDOs and subprime debt-related paper, the focus of US Securities & Exchange Commission charges against GS, to the long and powerful role of America's most profitable private bank in shifting oil prices whenever it wants.

As all oil traders know, GS has for years been a principal maker and breaker of Nymex oil price movements, but the exact mechanisms and methods used by GS are clouded by careful hiding of the traces, and by herd instinct discretion on the part of market players, the press and media. What we know is that with the announcement of US SEC charges of fraud against GS on April 16, oil prices plunged along with gold prices. This sell-off quickly moved on and amplified to a wave of selling across the commodity space - casting the Goldman shadow far and wide. We then got the technical rebound and bargain hunter buying, bringing us to today's date.

What happens next has several options. GS could wriggle free from the opprobrium of US SEC charges, and a chorus of political voices, like that of the UK's Gordon Brown, sniffing public acclaim from attacking the black sheep financial manipulators and market riggers who were so generously aided by the same politicians, in 2008-2009.


Market rigging by financial players is not just a theory but a vital revenue strategy: volatile prices generate earnings but flat-line, slow changing prices produce little. Action to intensify the change of daily traded price up or down, at a time and in a way they know, but other market players do not is the prized target for the big boy players. To be sure, the risk of market rigging is recognized by all governments and specific laws exist to punish market rigging, but the process is slow, cumbersome and often low yield for the politicians initiating the hunt for kudos.

Sometimes however the scale and impact of the rigging is so big the process shifts to another scale. This could now concern Goldman Sachs, for one reason because it is accused by the US SEC of serious fraud, linked with the still-sensitive US "subprime" crisis of 2007-2008. When the press and media focus swivels back to this period, GS oil market playing, if not rigging, will again be commented. Old and not forgotten legal action concerning the bank but not against it, is likely to be aired again. At that time, average readers will be able to learn that Goldman Sachs may have had a big role in the extreme rise and then fall of traded oil prices through 2007-2008.

The biggest example could concern the "last leg" of the upward spiral in Nymex prices for WTI, near instantly transmitted to day traded oil prices on London's ICE, Singapore's IPE, Tokyo's Tocom and elsewhere. Several journalists have described how they think Goldman Sachs rigged oil prices through 2007-2008 and specially in spring and summer of 2008. One example was a 'Forbes' article of April 13, 2009 by two journalists who examined the sudden financial collapse of the big US oil pipeline company Semgroup Holdings. This company was basically betting that oil prices would not go beyond about US$ 120 a barrel for WTI grade in the first 6 months of 2008. Semgroup, advised by Goldman Sachs, and dealing with the Goldman Sachs subsidiary J. Aron & Co for oil contracts, went on to take increasingly speculative positions, buying oil futures needing oil prices to fall by ever large amounts, simply to cover Semgroup's accumulated and rising losses.

By end-June 2008, Semgroup had accumulated a loss-making position on its oil futures contracts, of about US$ 2.4 billion. Being unable to pay the fees and costs to maintain its contracts to buy oil at a future and low price it asked Goldman Sachs to lend, or organize the lending of finance for the the margin calls, which GS refused. The coup de grace for this sequence was the very fast, one way rise in daily settlement prices for WTI in May-June 2008, culminating with the ultimate peak of around US$ 147 a barrel reached in early July. Semgroup went into receivership, and both GS and its J. Aron & Co subsidiary made very large profits.

Lawyers for Semgroup, during its bankruptcy hearings, argued that Goldman Sachs had through various mechanisms, and deliberately driven up day traded oil prices for WTI grade oil on the Nymex by around US$ 15 to 30 a barrel above any possible rational price, based on supply and demand fundamentals. This was done, the lawyers argued, to benefit Goldman Sachs when its very big client Semgroup went bankrupt. Shortly after, and as we know, day traded oil prices on the US Nymex started falling very fast, and to low levels from the peak of over US$ 145 a barrel for WTI in July 2008. As we know, almost immediately after the "last leg up", day traded prices started plunging, to an extreme low around US$ 30 a barrel in December 2008.


The methods used by only a select few, very big financial players operating in commodity markets to move prices around as they want are moved up a mighty notch in power and reach when they have a commodity index. These players can use their own proprietary CI or commodity price index as a weapon of mass destruction. For Goldman this is the S&P GSCI, with a heavy oil and petroleum products weighting. Coupling CI ownership with banking clout and leverage, and a myriad of financial products able to cover the traces of any rigging or manipulation, only a few players can rival Goldman Sachs in the basic capability to move oil prices up and down when they want, by however much they want. These few players, who all want to stay in business, have every incentive to think and act the same way, but creatively.

To be sure, it is unlikely the US SEC or any European regulators like the UK FSA now homing in on GS will widen their enquiry terms to cover all financial players both able and likely to rig oil prices, as well as other commodity prices, when they want. As we already said, proving a certain market really was rigged at a certain time is difficult, and traces can disappear rather face. One was the immediate sequel to the US SEC announcement of April 16: first oil and gold prices slid by a large amount, then other commodities joined oil and gold. This merely shows a lot of futures contracts were sold or disposed of, rapidly.

More interesting is to forecast what happens to oil and gold, and other commodity prices in the wake of Goldman Sachs being accused of criminal fraud by a US government agency. At this time, and with or without the helping hand of GS, both oil and gold are high priced, well supported, and have serious potential for further appreciation. As we saw in 2008, when oil moves beyond the glass ceiling of US$ 100 a barrel, momentum can quickly build for further highs. Whether or not a market rigger, even the biggest and best among them is seeking to drive the momentum for their own benefit will only change the time taken to reach unknown and exotic high prices. After that we move into the realms of realpolitik, geopolitics and inflation.

As we know, since the oil price explosion and implosion in May-Dec 2008, private banks and other market players were discreet and low in activity through most of 2009, but have now pushed oil prices back above US$ 80 a barrel, with gold periodically edged towards US$ 1200 an ounce and platinum poised to move above US$ 1800 an ounce. This is with near-recession lingering in Europe and Japan and a nice-on-paper but not the real world, US jobless economic recovery. Attributing present oil and gold prices to Emerging Economy growth is difficult, making it necessary to more than simply guess the machine of market rigging is alive and well - whether Goldman Sachs is temporarily absent from the party or not. As the global economy fitfully recovers, mainly because there is no alternative, the coming commodity price bounce will even take GS by surprise - unless of course GS programmed it !

By Andrew McKillop

Project Director, GSO Consulting Associates

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

© 2010 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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