Best of the Week
Most Popular
1.SNP Offers Labour Deadly Death Embrace Alliance, Holding England to Ransom, Destroy UK From Within - Nadeem_Walayat
2.Gold And Silver – Most Widely Used Currency In Western World? Stupidity - Michael_Noonan
3.Election Forecast 2015 - Coalition Economic Recovery vs Labour Collapse - Nadeem_Walayat
4.Election Forecast 2015 - Debates Boost Labour Into Opinion Polls Seats Lead - Nadeem_Walayat
5.Why are Interest Rates So Low? Ben Bernanke, Confused as Ever, Starts His Own Blog to Prove It - Mike_Shedlock
6.Leaders Debate Election 2015 - Natalie Bennett Green Party Convincing Anti-Austerity More Debt Argument - Nadeem_Walayat
7.Labour Economic Collapse vs Coalition Recovery - UK Election Forecast 2015 - Video - Nadeem_Walayat
8.China’s Stock Market Mania; How High can Red-chips Fly? - Gary_Dorsch
9.Gold and Misery, Strange Bedfellows - 31st Mar 15 - Dan_Norcini
10.Ed Miliband Debate Election 2015 Analysis - Labour Spending, Debt and Economic Collapse - Nadeem_Walayat
Last 5 days
Inflation, Central Banks, and Business Cycles - 18th Apr 15
Stock Market Correction May be Nearing End - 18th Apr 15
UK Housing Crisis, Immigration, Population Growth, Election Forecast 2015 - Video - 18th Apr 15
Q1 Corporate Earnings Risky for Stocks - 17th Apr 15
US Stock Market Getting Scarier by the Day - 17th Apr 15
Stock Market Watershed Day - 17th Apr 15
Gold Price Has “Hallmarks Of Market That Is Bottoming” - 17th Apr 15
Chinese Stock Market - Men Go Mad in Herds - 17th Apr 15
Two Stocks Offering Investors High Yields and Profits - 17th Apr 15
Gold Price Has “Hallmarks Of Market That Is Bottoming” - 17th Apr 15
Chinese Stock Market - Men Go Mad in Herds - 17th Apr 15
Two Stocks Offering Investors High Yields and Profits - 17th Apr 15
King Dollar Hurting Stock Market Corporate Earnings! - 17th Apr 15
Production Declines Hide Bigger Crude Oil Storage Issues - 17th Apr 15
Top Three Takeaways From Today’s OPEC Crude Oil Report… and How You Can Profit - 17th Apr 15
How to Profit from Australia's Healthiest Biotech Stocks - 17th Apr 15
What Is Really Driving Gold Price? - 17th Apr 15
Will Ever More Boomers Selling Retirement Assets Change Investment Prices For Decades? - 16th Apr 15
Won't Be Contagion with 'Grexit' Greece Euro-zone Exit - 16th Apr 15
Sharp Decline in USD/CAD and Its Consequences - 16th Apr 15
Blackstone is like Apple, Google, Hermes, Boeing - 16th Apr 15
The Most Dangerous Financial Headline I've Seen Since the 2008 Crisis - 16th Apr 15
Is Legal Tax Avoidance Extinct in the UK? - 16th Apr 15
Why Russia Will Send More Troops to Central Asia - 16th Apr 15
More Thoughts on the Current Crude Oil Market - 16th Apr 15
U.S. Treasury Secretary Warns Greek Exit Will Cause Enormous Disruption and Hardship - 16th Apr 15
The Hottest New Place to Find Stock Dividend Income in Q2/2015 - 15th Apr 15
How to Escape the Pensions Squeeze - 15th Apr 15
Water Crisis Game Changing Water Revolution - 15th Apr 15
The Drying of California - Corporate Farms Control of Water - 15th Apr 15
OPEC Going Broke, Dumping U.S. Dollars. Is That Good Or Bad? - 15th Apr 15
OPEC Just Confirmed It’s Losing the Oil War - 15th Apr 15
Four Uranium Companies Poised to Profit from the Growth of Nuclear Power - 15th Apr 15
Stock Investing Tread Softly… and Carry a Big Risk-Management Calculator - 15th Apr 15
Crude Oil Price Technical Outlook - 15th Apr 15
Important Bitcoin Price Action - 15th Apr 15
UK House Prices, Immigration, Population Growth and Election Forecast 2015 - 15th Apr 15
Peter Schiff on U.S. Dollars, Drachmas and Debt - Video - 14th Apr 15
The Ultimate Middle East Dilemma: Time For Us To Stop Intervening? - 14th Apr 15
Greece Debt Default and Drachma By End of April? - 14th Apr 15
Coming to Terms With the American Empire - 14th Apr 15
The Ball is in the Stock Market Bulls Court - 14th Apr 15
Tech Stocks Bubble: Different this time? - 14th Apr 15
Stock Market Sixth Sense - 14th Apr 15
Separating Gold and Silver Stocks Saints from the Sinners - 14th Apr 15
Conservatives Bribe Labour Voters by Extending Right to Buy to Housing Association Tenants - 14th Apr 15
Stacking Silver = Simple Solution - 13th Apr 15
Why Markets Ignored Weaker Payrolls - 13th Apr 15
Tory Attack on Ed Milliband Backfires as Labour Takes Opinion Polls Lead - 13th Apr 15
A "Digitalized" Stock Profit Play Mr. Spock Would Love - 13th Apr 15
New Credit Crunch Underway: Can Recession Be Far Behind? - 13th Apr 15
Western Interest in Gold Continues to Decline - 13th Apr 15
Stock Markets Breaking Out Worldwide - Buy the Dips Ride the Trend - 13th Apr 15
Silver Price set up to get Whacked Again - 13th Apr 15
Gold Price Dome Cap, Fall Below $1000 Likely - 13th Apr 15
Stock Market Accumulation or Distribution - 13th Apr 15
BLS Economic Propaganda, Truth – The Cure for Cognitive Dissonance - 12th Apr 15
A Case for Monetary Independence - 12th Apr 15
Drought and the Failure of Big Government in California - 12th Apr 15
Stocks Bull Market Continues - 11th Apr 15
Why the American Consumer Will Never Be Back - 11th Apr 15
End Of Islam, Hinduism And Christianity And Rise Of The Age Of Humanism, Spirituality And The Universal God - Sanadhana Dharma - 11th Apr 15
Gold And Silver Nothing Of Substance Going On. Fiat “Dollar” Controlling? - 11th Apr 15
The Most Dangerous Financial Headline I’ve Seen Since 2008 - 11th Apr 15
Alibaba Pggybank Investment Will Make You a Millionaire - 11th Apr 15
Ghosts In The Machine - Population Growth vs Food Production - 11th Apr 15
Gold-Futures Short Covering Rally - 11th Apr 15
Is Bitcoin Price Going down Some More? - 11th Apr 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

US Historic Bubble

The Great Oil Price Swindle- Market Manipulation or Fraud?

Commodities / Crude Oil May 31, 2008 - 02:32 PM GMT

By: Mike_Whitney

Commodities Best Financial Markets Analysis ArticleThe Commodity Futures and Trading Commission (CFTC) is investigating trading in oil futures to determine whether the surge in prices to record levels is the result of manipulation or fraud. They might want to take a look at wheat, rice and corn futures while they're at it. The whole thing is a hoax cooked up by the investment banks and hedge funds who are trying to dig their way out of the trillion dollar mortgage-backed securities (MBS) mess that they created by turning garbage loans into securities. That scam blew up in their face last August and left them scrounging for handouts from the Federal Reserve. Now the billions of dollars they're getting from the Fed is being diverted into commodities which is destabilizing the world economy; driving gas prices to the moon and triggering food riots across the planet.


For months we've been told that the soaring price of oil has been the result of Peak Oil, fighting in Iraq, attacks on oil facilities in Nigeria, labor problems in Norway, and (the all-time favorite)growth in China. It's all baloney. Just like Goldman Sachs prediction of $200 per barrel oil is baloney. If oil is about to skyrocket then why has G-Sax kept a neutral rating on some of its oil holdings like Exxon Mobile? Could it be that they know that oil is just another mega-inflated equity bubble---like housing, corporate bonds and dot.com stocks—that is about to crash to earth as soon as the big players grab a parachute?

There are three things that are driving up the price of oil: the falling dollar, speculation and buying on margin.

The dollar is tanking because of the Federal Reserve's low interest monetary policies have kept interest rates below the rate of inflation for most of the last decade. Add that to the $700 billion current account deficit and a National Debt that has increased from $5.8 trillion when Bush first took office to over $9 trillion today and it's a wonder the dollar hasn't gone “Poof” already.

According to a January 4 editorial in the Wall Street Journal: “If the dollar had remained 'as good as gold' since 2001, oil today would be selling at about $30 per barrel, not $99. (today $126 per barrel) The decline of the dollar against gold and oil suggests a US monetary that is supplying too many dollars.” Wall Street Journal 1-4-08

The price of oil has more than quadrupled since 2001, from roughly $30 per barrel to $126, WITHOUT ANY DISRUPTIONS TO SUPPLY. There's no shortage; it's just gibberish. 

As far as “buying on margin” consider this summary from author William Engdahl:

“A conservative calculation is that at least 60% of today's $128 per barrel price of crude oil comes from unregulated futures speculation by hedge funds, banks and financial groups using the London ICE Futures and New York NYMEX futures exchanges and uncontrolled inter-bank or Over-The-Counter trading to avoid scrutiny. US margin rules of the government's Commodity Futures Trading Commission allow speculators to buy a crude oil futures contract on the Nymex, by having to pay only 6% of the value of the contract. At today's price of $128 per barrel, that means a futures trader only has to put up about $8 for every barrel. He borrows the other $120. This extreme “leverage” of 16 to 1 helps drive prices to wildly unrealistic levels and offset bank losses in sub-prime and other disasters at the expense of the overall population.”


So the investment banks and their trading partners at the hedge funds can game the system for a mere 8 bucks per barrel or 16 to 1 leverage. Not bad, eh?

Is it possible that gambling on oil futures might be a temptation for banks that are already underwater from a trillion dollars worth of mortgage-related deals that have “gone south” leaving the banking system essentially bankrupt?

And if the banks and hedgies are not playing this game, then where is the money coming from? I have compiled charts and graphs that show that nearly two-thirds of the big investment banks' revenue came from the securitization of commercial and residential real estate loans. That market is frozen. Besides, this is not just a matter of “loan delinquencies” or MBS that have to be written off. The banks are "revenue starved". How are they filling the coffers? They're either neck-deep in interest rate swaps, derivatives trading, or gaming the futures market. Which is it?

Of course, there is one other possibility, but if that possibility turned out to be right than it would cast doubt on the legitimacy of the entire financial system. In fact, it would prove that the system is being rigged from the top-down by our friends at the Banking Politburo, the Federal Reserve. Here goes: 

What if the investment banks are trading their worthless MBS and CDOs at the Fed's auction facilities and using the money ($400 billion) to drive up the price of raw materials like rice, corn, wheat, and oil?

Could it be? Could the Fed really be looking the other way so it can bail out its banking buddies while they drive prices skyward?

If it is true; (and I suspect it is) it hasn't done much good. As the Associated Press reported yesterday:

“The Federal Reserve announced Thursday that it will make a fresh batch of short-term cash loans available to squeezed banks as part of an ongoing effort to ease stressed credit markets. The Fed said it will conduct three auctions in June, with each one making $75 billion available in short-term cash loans. Banks can bid for a slice of the available funds. It would mark the latest round in a program that the Fed launched in December to help banks overcome credit problems so they will keep lending to customers.”

Another $225 billion for the bankers and not a dime for the struggling homeowner! The Fed is bankrupting the country with their permanent rotating loans to keep reckless speculators from going under. So much for moral hazard.

As far as speculation, there is ample evidence that the system is being manipulated. According to MarketWatch:

“Speculative activity in commodity markets has grown "enormously" over the past several years, the Homeland Security and Governmental Affairs Committee said in a news release. It pointed out that in five years, from 2003 to 2008, investment in the index funds tied to commodities has grown by 20-fold -- to $260 billion from $13 billion.”

And here's a revealing clip from the testimony of Michael W. Masters of Masters Capital Management, LLC, who addressed the issue of “Commodities Speculation” before the Committee on Homeland Security and Governmental Affairs this week:

“Today, Index Speculators are pouring billions of dollars into the commodities futures markets, speculating that commodity prices will increase. ...In the popular press the explanation given most often for rising oil prices is the increased demand for oil from China. According to the DOE, annual Chinese demand for petroleum has increased over the last five years from 1.88 billion barrels to 2.8 billion barrels, an increase of 920 million barrels.8 Over the same five-year period, Index Speculatorsʼ demand for petroleum futures has increased by 848 million barrels.

THE INCREASE IN DEMAND FROM INDEX SPECULATORS IS ALMOST EQUAL TO THE INCREASE IN DEMAND FROM CHINA.

Index Speculators have now stockpiled, via the futures market, the equivalent of 1.1 billion barrels of petroleum, effectively adding eight times as much oil to their own stockpile as the United States has added to the Strategic Petroleum Reserve over the last five years.

Today, in many commodities futures markets, they are the single largest force.15 The huge growth in their demand has gone virtually undetected by classically-trained economists who almost never analyze demand in futures markets.

As money pours into the markets, two things happen concurrently: the markets expand and prices rise. One particularly troubling aspect of Index Speculator demand is that it actually increases the more prices increase. This explains the accelerating rate at which commodity futures prices (and actual commodity prices) are increasing. The CFTC has taken deliberate steps to allow CERTAIN SPECULATORS VIRTUALLY UNLIMITED ACCESS TO THE COMMODITIES FUTURES MARKETS.

The CFTC has granted Wall Street banks an exemption from speculative position limits when these banks hedge over-the-counter swaps transactions. This has effectively opened a loophole for unlimited speculation. When Index Speculators enter into commodity index swaps, which 85-90% of them do, they face no speculative position limits.... The result is a gross distortion in data that effectively hides the full impact of Index Speculation.” (Thanks to Mish's Global Economic Trend Analysis; the one “indispensable” financial blog on the Internet)

Masters adds that the CFTC is pressing to make “Index Speculators exempt from all position limits” so they can make “unlimited” bets on the futures which are wreaking havoc on the global economy and pushing millions towards starvation. Of course, these things pale in comparison to the higher priority of fatting the bottom line of the parasitic investor class.

Brimming oil tankers are presently sitting off the coasts of Iran and Louisiana. The Strategic Petroleum Reserve has been filled. Demand is flat. The world's biggest consumer of energy (guess who?) is cutting back . As CNN reports:

“At a time when gas prices are at an all-time high, Americans have curtailed their driving at a historic rate. The Department of Transportation said figures from March show the steepest decrease in driving ever recorded. Compared with March a year earlier, Americans drove an estimated 4.3 percent less -- that's 11 billion fewer miles, the DOT's Federal Highway Administration said Monday, calling it "the sharpest yearly drop for any month in FHWA history." (CNN)

The great oil crunch is another fabricated crisis; another "smoke and mirrors" fiasco; another Enron-type shell-game engineered by banksters and hedge fund managers. Once again, the bloody footprints can be traced right back to the front door of the Federal Reserve. Don't expect help from the regulators either; they've all been replaced with business reps like Harvey Pitt or Hank Paulson. The only time anyone in the Bush administration finds their conscience is when they're offered a multi-million dollar “tell all” book deal.

Can you hear me, Scotty?

By Mike Whitney

Email: fergiewhitney@msn.com

Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.

Mike Whitney Archive

© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments


31 May 08, 15:35
oil price rise

Mike, your thesis does not explain for the rise in oil prices and other commodities over the past several years. The sub-prime debacle only began last year. While it is inevitable that futures markets are being driven parabolically higher in fear of future supply-demand concerns, it is nevertheless in response to anticipated supply concerns with growing demand. You may also want to note that the hedgers and investors are often operating on behalf of industiries that rely on securing positions in these raw materials. SW airline alone has futures contracts until 2014 and keeps $5 BN cash against it.

You figure a 1:16 leverage and that's just one company taking on a position. You ain't seen nothing yet.


Valerio
07 Jun 08, 04:29
Subprime bubble

Mike, do you really think subprime mortgage assets bubble burst all of sudden, out of the blue banks found themselves broke? Goldman's analysts, just to refer to best in class, foresaw this at least couple of years ahead, while every HF was joining the bandwagon.


joseph.slowiak
09 Jun 08, 11:19
Farce

prime the money pump


Scott
10 Jul 08, 22:32
Wealth Re-Distribution

Mike, there is some basis to the theory that a re-distribution of wealth is also behind a lot of the jump in commodities. If we are truly not in a shortage position in oil supply and Western developed economies can pay $150 per barrel, then growth in developing economies can occur much more rapidly as wealth is transferred to countries such as Nigeria,Columbia,India etc...Look at how powerful Brazil has become on the oil stage as there exports boom, and they are %90 oil independant.


Hamada
08 Aug 08, 20:37
Oil Prices Fraud
Oil prices had been going up since Iraq invaision. Fueled by fear of Invading Iran in the last two years, got us from $70 to current levels. I agree that all of this was only speculation, if there was any world wide shortage of oil how come we did not see any long lines at fuel pumps anywhere around the world? When people talk about China and India economic growth due to their population, let us not kid ourselves. Not everybody in China, or India drive a car. NOt every teenager has a car. People tend to use mass transit, and most people cannot afford cars to start with.So the billion plus population factor just scares people to really think that 90% of that billion actually do not drive, so 100 million new drivers would not increase the world price, since that figure is small percentage of total drivers around the world.

If I am wrong, show me the long lines of fueling cars anywhere around the world, or in China or India for that matter!

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014