The $2.5 Trillion Global Oil Scam: Intercontinental Exchange Commodity Manipulation

[FastTadpole]

Brilliant, easy to swallow, summary of the ICE manipulation of commodity markets. This isn't the half of it considering the hidden big middle man between drilling, royalties, oil companies, government taxes and the pump, the IMF, a stealth tax up oil prices on what is essentially pumped out of the ground for $1.00 (Saudi Arabia and the middle East) to $3.50 (Alberta oil sands) a barrel, which makes ~19.5 gallons (73.8 liters) of gasoline after refinement. This amounts to 5 to 18 cents a gallon (1.4 to 4.7 cents a liter) for getting it out of the ground and into a barrel. This is minus exploration and refinement - and all of the other middle men involved not sure on all those figures yet but you can see the figures don't add up. It goes to all sorts of IMF programs, overt and covert. From NGO funding to 3rd world debt relief. All this to go along with that peak oil artificial scarcity bunk. Even with this grand theft going on the boys at the upper echelons could give 2 shits about getting your $20 though - they just don't want YOU to have it keeping your average person in perpetual poverty or as close to it as possible to keep them toiling in the factories to earn their daily bread.

ICE is another middle man so Wall Street and some of the other players can inflate the price get a cut on the action as well.

Quote:The $2.5 trillion global oil scam
By Dan Jones | 11/17/09 - 09:00

Apparently, there's a global oil scam making Bernie Madoff look like a petty thief.

If serial entrepreneur and Seeking Alpha columnist Philip Davis is to be believed, the world is being scammed out of $2.5 trillion, 50 times greater than the sum Madoff took from the duped investors.

According to Davis, the scam starts in 2000 with the formation of the ICE - the Intercontinental Exchange. The ICE - founded by Goldman Sachs, Morgan Stanley, BP, Total, Shell, Deutsche Bank and Societe Generale - is an online commodities and futures marketplace that exists outside the US and operates free from the constraints of US laws.

After a Congressional investigation into energy trading in 2003, the ICE was found to be facilitating "round-trip" trades. This is where one firm sells energy to another, and then the second firm sells the same amount of energy back to the first company, at the same time and at the exact same price, as told by Davis.

No commodity ever changes hands

Quite shockingly no commodity ever changes hands, but the transactions still send a signal to the market, artificially boosting company revenue. Angry yet? There's more.

Because the trading is unregulated by Washington, its difficult to gauge the scale on which "round-trip" trading takes place.

But when DMS Energy were investigated by Congress, the company admitted that 80 percent of its trades in 2001 were round-trip trades. This means 80 percent of all trades in that year were false trades. Not a drop of oil changed hands, but the balance sheets showed increased revenue.

The idea is to hike up commodity prices. For example, according to Davis, after the ICE turned commodity trading into a "speculative casino game where pricing was notional and contracts could be sold by people who never produced a thing, to people who didn't need the things that were not produced", Goldman Sachs were able to triple the price of commodities in just five years.

ICE can create artificial shortages and drive speculative demand

The beauty (or rather the horror) of the scam outlined by Davis is that because they control the oil markets, the ICE can create artificial shortages and drive speculative demand in order to charge consumers an extra dollar per gallon of gas. And whereas this may not seem like much, this $1 soon becomes $50 billion A MONTH as global drivers consume 1.7 billion gallons of gas every single day.

Whereas, at this stage, it would not be accurate or indeed wise to suggest what Philip Davis claims is either true or false, one cannot ignore the issue. There have been concerns for many years that global markets are controlled by a monopoly of mega-organizations, but there could be a strong case for suggesting the ICE is close to becoming just that - a super-organization with the power to push oil prices up or down.

Good luck Washington, you might just be getting a deluge of mail demanding answers.

http://digg.com/world_news/The_2_5_Trill..._Slideshow
http://www.ngoilgas.com/news/25-trillion...-oil-scam/

Click for the slideshow presentation.

Quote:2.5 Trillion Oil Scam - Presentation Transcript

1. The $2,5Trillion global OIL scam
2. In 2000 the Intercontinental Exchange (ICE) was founded It consists of Goldman Sachs, Morgan Stanley, BP, Total, Shell, Deutsche Bank and Societe Generale
3. The ICE is an online commodities and futures marketplace Which operates outside of the US and is free from the constraints of US laws
4. The futures and commodities it trades include: Cocoa Coffee ‘C’ Cotton Sugar No. 11 Coal Conola OIL Emissions ...and of course
5. 80 70 60 Over this year the price 50 of oil has almost doubled 40 Jan 09 May
6. Is it because demand is too great for supply? NO According to the International Energy Agency, worldwide demand is down 2.6 million barrels a day from last year
7. With Saudi production from the Khursaniyah and Khurais oil fields set to increase its output... ...and the Thunder Horse platform in the Gulf of Mexico to start production soon Both of these will contribute another 1.2 million barrels of oil per day to the world market by next year
8. as a result THERE WOULD BE AN EXCESS OF OIL ON THE MARKET so why the high price?
9. The ICE conducts what is know as “ROUND-TRIP” trading of energy These trades occur when one firm sells energy to another and then the second firm simultaneously sells the same amount of energy back to the first company at exactly the same price NO COMMODITY EVER CHANGES HANDS but these transactions send a price signal to the market and they artificially boost revenue for the company
10. DMS Energy, when investigated by Congress, admitted that 80% of its trades in 2001 were “ROUND-TRIP” trades. Duke Energy disclosed that $1.1 billion worth of trades were “ROUND-TRIP” since 1999. Roughly two-thirds of these were done on the ICE Under investigation, a lawyer for JPMorgan Chase admitted the bank engineered a series of “ROUND-TRIP” trades with Enron
11. These extra fees are then passed on to you... THE CONSUMER
12. Every year over $1 Trillion is spent by US consumers because of “ROUND-TRIP” trading of oil or 13% of the incomes of every man, woman and child in the United States of America or 13% more on food and fuel than before the ICE was founded
13. and with 1.7 bn gallons of gas used globally every single day the artificial shortage and speculative demand created by “ROUND-TRIP” trading means that companies could charge you an extra one dollar per gallon of gas that might not seem like much
14. but that one extra dollar would equate to... $50 bn a month for
15. and a $2.5 Trillion global OIL scam by the ICE each year
16. for further reading...
http://seekingalpha.com/article/172797-t...han-madoff
http://www.businessweek.com/lifestyle/co...page_2.htm
http://www.businessweek.com/lifestyle/co...520796.htm
http://www.nytimes.com/2009/06/09/business/09gas.html

http://www.slideshare.net/theoilman/25-t...n-oil-scam

Pass it on

[kevlar]

their oil they can charge whatever they want for it ?

[FastTadpole]

The there is also the elephant on supply restriction and, of course, taxation on so many levels to restrict the lifeblood to power a nation. Seems Obama's masters are doing their part in getting their puppet to assist this agenda for the cartel to pinch off supply and control the world's most plentiful, accessible and cheapest (or at least it should be) energy resource available at this time.

I had heard that Alaska, in particular, has oil reserves in excess of those in Saudi Arabia up around the protected (banned) drilling areas. It brings to mind the DeBeers scam in the ~1880s when they cornered the diamond market. Same game plan in manipulating a plentiful commodity into perceived scarcity to drive up the cost to the consumer.

Quote:PYLE: Oil drilling head fake
Obama didn't open land for energy production, he closed it
Monday, April 5, 2010
By Thomas J. Pyle

Nearly 30 years ago, Congress imposed a moratorium on the safe and environmentally sound practice of offshore oil and natural-gas exploration. In the early 1990s, President George H.W. Bush imposed a similar ban in the form of an executive order. And while this ban was in place for decades, many in Congress and the public at large had no idea that the United States was the only country in the industrialized world purposely embargoing its own energy resources.

Fast-forward to the summer of 2008: Oil was $150 a barrel, the price at the pump exceeded $4 a gallon, and the American people - of all political stripes - were genuinely outraged. In response, the Democrat-controlled Congress and President George W. Bush retired both the congressional and executive bans on offshore oil and natural-gas production. That move effectively opened nearly the entire Outer Continental Shelf (OCS) for responsible energy production.

Now fast-forward to March 2010: President Obama announced that he, for the first time, is opening new lands in the OCS for energy exploration. You might be scratching your head at this point, because many energy-industry leaders, newspaper reporters, cable news pundits, lawmakers and politicos applauded the president's announcement as some major policy breakthrough and the White House's willingness to compromise on energy policy. However, the announcement, along with the president's sudden eagerness to trade his proposed national energy tax for increased oil and natural-gas drilling, is nothing more than political theater.

Enter reality. Mr. Obama did not open anything. In fact, he locked up vast amounts of energy reserves. In March, as it has been for nearly two years, almost all of the OCS was open. Now, in April, the entire West Coast, the North Atlantic and portions of Alaska are off-limits.

The president's speech did not move this nation any closer to creating the 1.2 million jobs that development of the OCS would make possible. The president did not move us any closer to producing more domestic oil and natural gas. And he certainly didn't move us any closer to reaping the benefits of affordable, reliable energy - including the trillions of dollars increased exploration and production would add to the government's ever-dwindling coffers through the collection of increased royalties and tax revenues.

What the President did do was delay a scheduled lease sale off the Virginia OCS from 2011 to 2012. He also locked up areas that hold a resources potential of up to 77 billion barrels of oil - more oil than the entire Russian reserve and three times as much as the current U.S. recoverable reserves.

The administration claims Mr. Obama is opening up the Atlantic coast from Delaware to Georgia for exploration. But further examination of his actions - in direct contrast to his words - shows that he only announced a study of this area for potential offshore leasing many years down the road.

More offshore exploration and production would create upward of 1.2 million jobs and nearly $70 billion in annual wages. The president knows this and said as much in his speech. He clearly understands that more than two-thirds of the American people support offshore exploration, that it would create good-paying jobs and make our nation more secure and economically competitive. That's why he is going to great lengths to appear to support more offshore exploration and production, while in reality, his administration has done everything in its power to deny Americans access to the energy that rightfully belongs to them.

So, one may ask, why all the hype and fanfare? We have a little inkling as to the goal of this particular stage show.

Many readers of this page are acutely aware of the various cap-and-trade proposals moving through the Senate in an attempt to levy a tax on coal, natural gas and oil, which provide us with 85 percent of our energy needs. Sen. Lindsey Graham, South Carolina Republican, has been leading the charge to "price carbon," while others, with the backing of some big oil companies, recently have advocated for an increase in the gasoline tax. Could the president's announcement last week have been designed to appease both camps and finally move cap-and-trade through the Senate?

When Mr. Graham took to the pages of the New York Times with Sen. John Kerry, Massachusetts Democrat, to outline their plan for global-warming legislation in the Senate, they made mention of a "comprehensive" approach, defined as a package to include increased nuclear power and offshore oil and natural-gas drilling.

Just a few weeks ago, on Feb. 16, Mr. Obama and Energy Secretary Steven Chu announced that the administration would award $8.3 billion taxpayer-backed loan guarantees to build two new nuclear reactors in Georgia. At face value, this announcement was a nod toward increased nuclear-energy production and, of course, the mainstream media reported it as being a bold step toward compromise to the all-of-the-above approach being advanced by the Republican leadership. And yet, just days before the announced taxpayer-funded nuclear giveaway, the administration zeroed out funding for the creation of a nuclear-waste repository in Yucca Mountain. Never mind the glaring policy contradiction here and the virtual guarantee of the status quo on nuclear-power production as a result.

So there you have it. In two carefully crafted stage performances on nuclear and offshore oil and gas production, the president just may have provided his allies with enough political cover finally to move cap-and-trade through the Senate and impose a national energy tax on an unwilling American public.

Thomas J. Pyle is president of the Institute for Energy Research and American Energy Alliance.

http://digg.com/politics/PYLE_Oil_drilli...gton_Times
http://www.washingtontimes.com/news/2010...ries-today

[FastTadpole]

An oldie but a goodie ..

Quote:‘Perhaps 60% of today’s oil price is pure speculation’
by F. William Engdahl
May 2, 2008

The price of crude oil today is not made according to any traditional relation of supply to demand. It’s controlled by an elaborate financial market system as well as by the four major Anglo-American oil companies. As much as 60% of today’s crude oil price is pure speculation driven by large trader banks and hedge funds. It has nothing to do with the convenient myths of Peak Oil. It has to do with control of oil and its price. How?

First, the crucial role of the international oil exchanges in London and New York is crucial to the game. Nymex in New York and the ICE Futures in London today control global benchmark oil prices which in turn set most of the freely traded oil cargo. They do so via oil futures contracts on two grades of crude oil—West Texas Intermediate and North Sea Brent.

A third rather new oil exchange, the Dubai Mercantile Exchange (DME), trading Dubai crude, is more or less a daughter of Nymex, with Nymex President, James Newsome, sitting on the board of DME and most key personnel British or American citizens.

Brent is used in spot and long-term contracts to value as much of crude oil produced in global oil markets each day. The Brent price is published by a private oil industry publication, Platt’s. Major oil producers including Russia and Nigeria use Brent as a benchmark for pricing the crude they produce. Brent is a key crude blend for the European market and, to some extent, for Asia.

WTI has historically been more of a US crude oil basket. Not only is it used as the basis for US-traded oil futures, but it's also a key benchmark for US production.



‘The tail that wags the dog’

All this is well and official. But how today’s oil prices are really determined is done by a process so opaque only a handful of major oil trading banks such as Goldman Sachs or Morgan Stanley have any idea who is buying and who selling oil futures or derivative contracts that set physical oil prices in this strange new world of “paper oil.”

With the development of unregulated international derivatives trading in oil futures over the past decade or more, the way has opened for the present speculative bubble in oil prices.

Since the advent of oil futures trading and the two major London and New York oil futures contracts, control of oil prices has left OPEC and gone to Wall Street. It is a classic case of the “tail that wags the dog.”

A June 2006 US Senate Permanent Subcommittee on Investigations report on “The Role of Market Speculation in rising oil and gas prices,” noted, “…there is substantial evidence supporting the conclusion that the large amount of speculation in the current market has significantly increased prices.”

What the Senate committee staff documented in the report was a gaping loophole in US Government regulation of oil derivatives trading so huge a herd of elephants could walk through it. That seems precisely what they have been doing in ramping oil prices through the roof in recent months.

The Senate report was ignored in the media and in the Congress.

The report pointed out that the Commodity Futures Trading Trading Commission, a financial futures regulator, had been mandated by Congress to ensure that prices on the futures market reflect the laws of supply and demand rather than manipulative practices or excessive speculation. The US Commodity Exchange Act (CEA) states, “Excessive speculation in any commodity under contracts of sale of such commodity for future delivery . . . causing sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity, is an undue and unnecessary burden on interstate commerce in such commodity.”

Further, the CEA directs the CFTC to establish such trading limits “as the Commission finds are necessary to diminish, eliminate, or prevent such burden.” Where is the CFTC now that we need such limits?

They seem to have deliberately walked away from their mandated oversight responsibilities in the world’s most important traded commodity, oil.

Enron has the last laugh…

As that US Senate report noted:

“Until recently, US energy futures were traded exclusively on regulated exchanges within the United States, like the NYMEX, which are subject to extensive oversight by the CFTC, including ongoing monitoring to detect and prevent price manipulation or fraud. In recent years, however, there has been a tremendous growth in the trading of contracts that look and are structured just like futures contracts, but which are traded on unregulated OTC electronic markets. Because of their similarity to futures contracts they are often called “futures look-alikes.”

The only practical difference between futures look-alike contracts and futures contracts is that the look-alikes are traded in unregulated markets whereas futures are traded on regulated exchanges. The trading of energy commodities by large firms on OTC electronic exchanges was exempted from CFTC oversight by a provision inserted at the behest of Enron and other large energy traders into the Commodity Futures Modernization Act of 2000 in the waning hours of the 106th Congress.

The impact on market oversight has been substantial. NYMEX traders, for example, are required to keep records of all trades and report large trades to the CFTC. These Large Trader Reports, together with daily trading data providing price and volume information, are the CFTC’s primary tools to gauge the extent of speculation in the markets and to detect, prevent, and prosecute price manipulation. CFTC Chairman Reuben Jeffrey recently stated: “The Commission’s Large Trader information system is one of the cornerstones of our surveillance program and enables detection of concentrated and coordinated positions that might be used by one or more traders to attempt manipulation.”

In contrast to trades conducted on the NYMEX, traders on unregulated OTC electronic exchanges are not required to keep records or file Large Trader Reports with the CFTC, and these trades are exempt from routine CFTC oversight. In contrast to trades conducted on regulated futures exchanges, there is no limit on the number of contracts a speculator may hold on an unregulated OTC electronic exchange, no monitoring of trading by the exchange itself, and no reporting of the amount of outstanding contracts (“open interest”) at the end of each day.” 1

Then, apparently to make sure the way was opened really wide to potential market oil price manipulation, in January 2006, the Bush Administration’s CFTC permitted the Intercontinental Exchange (ICE), the leading operator of electronic energy exchanges, to use its trading terminals in the United States for the trading of US crude oil futures on the ICE futures exchange in London – called “ICE Futures.”

Previously, the ICE Futures exchange in London had traded only in European energy commodities – Brent crude oil and United Kingdom natural gas. As a United Kingdom futures market, the ICE Futures exchange is regulated solely by the UK Financial Services Authority. In 1999, the London exchange obtained the CFTC’s permission to install computer terminals in the United States to permit traders in New York and other US cities to trade European energy commodities through the ICE exchange.

The CFTC opens the door

Then, in January 2006, ICE Futures in London began trading a futures contract for

West Texas Intermediate (WTI) crude oil, a type of crude oil that is produced and delivered in

the United States. ICE Futures also notified the CFTC that it would be permitting traders in the United States to use ICE terminals in the United States to trade its new WTI contract on the ICE Futures London exchange. ICE Futures as well allowed traders in the United States to trade US gasoline and heating oil futures on the ICE Futures exchange in London.

Despite the use by US traders of trading terminals within the United States to trade US oil, gasoline, and heating oil futures contracts, the CFTC has until today refused to assert any jurisdiction over the trading of these contracts.

Persons within the United States seeking to trade key US energy commodities – US crude oil, gasoline, and heating oil futures – are able to avoid all US market oversight or reporting requirements by routing their trades through the ICE Futures exchange in London instead of the NYMEX in New York.

Is that not elegant? The US Government energy futures regulator, CFTC opened the way to the present unregulated and highly opaque oil futures speculation. It may just be coincidence that the present CEO of NYMEX, James Newsome, who also sits on the Dubai Exchange, is a former chairman of the US CFTC. In Washington doors revolve quite smoothly between private and public posts.

A glance at the price for Brent and WTI futures prices since January 2006 indicates the remarkable correlation between skyrocketing oil prices and the unregulated trade in ICE oil futures in US markets. Keep in mind that ICE Futures in London is owned and controlled by a USA company based in Atlanta Georgia.

In January 2006 when the CFTC allowed the ICE Futures the gaping exception, oil prices were trading in the range of $59-60 a barrel. Today some two years later we see prices tapping $120 and trend upwards. This is not an OPEC problem, it is a US Government regulatory problem of malign neglect.

By not requiring the ICE to file daily reports of large trades of energy commodities, it is not able to detect and deter price manipulation. As the Senate report noted, “The CFTC's ability to detect and deter energy price manipulation is suffering from critical information gaps, because traders on OTC electronic exchanges and the London ICE Futures are currently exempt from CFTC reporting requirements. Large trader reporting is also essential to analyze the effect of speculation on energy prices.”

The report added, “ICE's filings with the Securities and Exchange Commission and other evidence indicate that its over-the-counter electronic exchange performs a price discovery function -- and thereby affects US energy prices -- in the cash market for the energy commodities traded on that exchange.”

Hedge Funds and Banks driving oil prices

In the most recent sustained run-up in energy prices, large financial institutions, hedge funds, pension funds, and other investors have been pouring billions of dollars into the energy commodities markets to try to take advantage of price changes or hedge against them. Most of this additional investment has not come from producers or consumers of these commodities, but from speculators seeking to take advantage of these price changes. The CFTC defines a speculator as a person who “does not produce or use the commodity, but risks his or her own capital trading futures in that commodity in hopes of making a profit on price changes.”

The large purchases of crude oil futures contracts by speculators have, in effect, created an

additional demand for oil, driving up the price of oil for future delivery in the same manner that additional demand for contracts for the delivery of a physical barrel today drives up the price for oil on the spot market. As far as the market is concerned, the demand for a barrel of oil that results from the purchase of a futures contract by a speculator is just as real as the demand for a barrel that results from the purchase of a futures contract by a refiner or other user of petroleum.

Perhaps 60% of oil prices today pure speculation

Goldman Sachs and Morgan Stanley today are the two leading energy trading firms in the United States. Citigroup and JP Morgan Chase are major players and fund numerous hedge funds as well who speculate.

In June 2006, oil traded in futures markets at some $60 a barrel and the Senate investigation estimated that some $25 of that was due to pure financial speculation. One analyst estimated in August 2005 that US oil inventory levels suggested WTI crude prices should be around $25 a barrel, and not $60.

That would mean today that at least $50 to $60 or more of today’s $115 a barrel price is due to pure hedge fund and financial institution speculation. However, given the unchanged equilibrium in global oil supply and demand over recent months amid the explosive rise in oil futures prices traded on Nymex and ICE exchanges in New York and London it is more likely that as much as 60% of the today oil price is pure speculation. No one knows officially except the tiny handful of energy trading banks in New York and London and they certainly aren’t talking.

By purchasing large numbers of futures contracts, and thereby pushing up futures

prices to even higher levels than current prices, speculators have provided a financial incentive for oil companies to buy even more oil and place it in storage. A refiner will purchase extra oil today, even if it costs $115 per barrel, if the futures price is even higher.

As a result, over the past two years crude oil inventories have been steadily growing, resulting in US crude oil inventories that are now higher than at any time in the previous eight years. The large influx of speculative investment into oil futures has led to a situation where we have both high supplies of crude oil and high crude oil prices.

Compelling evidence also suggests that the oft-cited geopolitical, economic, and natural factors do not explain the recent rise in energy prices can be seen in the actual data on crude oil supply and demand. Although demand has significantly increased over the past few years, so have supplies.

Over the past couple of years global crude oil production has increased along with the increases in demand; in fact, during this period global supplies have exceeded demand, according to the US Department of Energy. The US Department of Energy’s Energy Information Administration (EIA) recently forecast that in the next few years global surplus production capacity will continue to grow to between 3 and 5 million barrels per day by 2010, thereby “substantially thickening the surplus capacity cushion.”

Dollar and oil link

A common speculation strategy amid a declining USA economy and a falling US dollar is for speculators and ordinary investment funds desperate for more profitable investments amid the US securitization disaster, to take futures positions selling the dollar “short” and oil “long.”

For huge US or EU pension funds or banks desperate to get profits following the collapse in earnings since August 2007 and the US real estate crisis, oil is one of the best ways to get huge speculative gains. The backdrop that supports the current oil price bubble is continued unrest in the Middle East, in Sudan, in Venezuela and Pakistan and firm oil demand in China and most of the world outside the US. Speculators trade on rumor, not fact.

In turn, once major oil companies and refiners in North America and EU countries begin to hoard oil, supplies appear even tighter lending background support to present prices.

Because the over-the-counter (OTC) and London ICE Futures energy markets are unregulated, there are no precise or reliable figures as to the total dollar value of recent spending on investments in energy commodities, but the estimates are consistently in the range of tens of billions of dollars.

The increased speculative interest in commodities is also seen in the increasing popularity of commodity index funds, which are funds whose price is tied to the price of a basket of various commodity futures. Goldman Sachs estimates that pension funds and mutual funds have invested a total of approximately $85 billion in commodity index funds, and that investments in its own index, the Goldman Sachs Commodity Index (GSCI), has tripled over the past few years. Notable is the fact that the US Treasury Secretary, Henry Paulson, is former Chairman of Goldman Sachs.

F. William Engdahl is an Associate of the Centre for Research on Globalization (CRG) and author of A Century of War: Anglo-American Oil Politics and the New World Order. He may be contacted at info@engdahl.oilgeopolitics.net

http://digg.com/business_finance/Perhaps...culation_3
http://www.globalresearch.ca/index.php?c...a&aid=8878

[h3rm35]

The ABCs of Oil Manipulation

Clearly, manipulation has been going on in the global market in oil – there’s nothing new about that – it’s what intermediaries who transact for profit do and have always done. Indeed, some market wags say that trading could be defined as “acceptable market manipulation”. But until the last few years what consenting adults were doing among themselves in the oil market didn’t really affect the man in the street.

But things have changed. We have now reached the culmination of a process of financialisation of the oil market to a degree where the market has become entirely sociopathic. It now operates to the detriment of consumers and producers alike and for the benefit of the intermediaries who control the market.

How did we get here? Who’s doing it? How are they doing it? And what can be done about it?

A Brief History
For a good many years a few major oil companies – the Seven Sisters – more or less tied up the oil market in long term contracts and there was little trading. They simply refined what they produced.

Through the Seventies and Eighties, after oil producer nations asserted themselves, trading in cargoes of physical oil and products began, and independent traders sprang up alongside the trading arms of some of the oil majors.

When I joined the International Petroleum Exchange as Head of Compliance and Market Regulation in 1990, the growing market in oil derivative contracts (futures and options contracts the purpose of which is to manage oil price risk) took off dramatically with the first Gulf War, and the IPE never looked back.

During my time at IPE major investment banks were completing a transformation into “Wall Street Refiners” who provided liquidity to the end user producers of oil and consumers of oil products who use derivative markets to “hedge” the risk that prices may fall, or rise, respectively. Indeed, I unwittingly facilitated their emergence by introducing new trading tools such as “Exchange of Futures for Swaps”, “Volatility Trades” and “Settlement Trades” which became hugely successful.

When I left IPE in 1996 the pieces on the present day oil market chessboard were pretty much set, and the game was commencing. It was already clear that the trend towards screen trading was unstoppable, despite the wishful thinking of the traders on IPE’s open outcry trading floor. Moreover, market participation of investors through funds was already visible in embryonic form.

A Partnership made in Heaven?
There are probably few more influential people than Peter Sutherland. An Irishman with a high level legal and political background, he became a non-executive director of BP as early as 1990, and after a brief but successful period to 1995 as head of the World Trade Organization he has been on the BP board ever since, from 1997 as chairman. He has also chaired Goldman Sachs International (GS) since 1995.

Lord Browne of Madingley was a career BP man who ascended to the top in 1995 and eventually fell from grace in May 2007 shortly before he was due to retire. He was on the Board of Goldman Sachs from May 1999 until May 2007.

BP have always been natural traders. Unlike Exxon (XOM), who are vertically integrated and produce & refine oil and distribute products, BP sell the oil they produce on the market, and buy the oil they refine. In the years since 1995, BP has made phenomenal profits by trading oil and oil derivatives.

So have Goldman Sachs. You don’t rise to the top in Goldman Sachs unless you are responsible for making a great deal of money: and their energy trading operations have made immense amounts.

The key player in Goldman Sachs is the current CEO Lloyd Blankfein, who rose to the top through Goldman’s commodity trading arm J Aron, and indeed he started his career at J Aron before Goldman Sachs bought J Aron over 25 years ago. With his colleague Gary Cohn, Blankfein oversaw the key energy trading portfolio.

It appears clear that BP and Goldman Sachs have been working collaboratively – at least at a strategic level – for maybe 15 years now. Their trading strategy has evolved over time as the global market has developed and become ever more financialised. Moreover, they have been well placed to steer the development of the key global energy market trading platform, and the legal and regulatory framework within which it operates.

The ICE Forms
The founder/entrepreneur behind the Intercontinental Exchange (ICE) is Jeffrey Sprecher – the current CEO – who saw early the potential of screen trading for energy. He acquired the US-based Continental Power Exchange in 1997 as awareness of the Internet began to spread, and everyone grabbed for market platform territory, with Enron Online leading the way.

But my understanding is that the Continental Power Exchange would in all likelihood have gone the way of most Internet start ups had Gary Cohn of Goldman Sachs and John Shapiro of Morgan Stanley (MS) not had dinner and agreed to set up an exchange. Their two firms put up the initial capital, and their stroke of genius was to offer to the other founder members – BP, Deutsche Bank (DB), Shell (RDS.A), Soc Gen (SCGLY.PK) and Total (TOT) – an inspired deal. In exchange for providing liquidity these traders would receive equity in the exchange, alongside Sprecher’s Continental Power Exchange, which was the other founder.

At a stroke ICE was created and had transcended the Liquidity/Neutrality paradox of the Internet: if a platform is neutral, then it’s not liquid: and if it’s liquid, it’s not neutral. By 2001 things were really cooking; other trader/shareholders had joined ICE (having had to buy in); but the key was to actually reach the thousands of participants out there who were the actual “end users” of the market.

An approach to acquire NYMEX was rejected, since NYMEX membership was dominated by independent “locals” who were and are in competition with the investment banks as financial intermediaries. However, in July 2001 ICE acquired for a pittance the International Petroleum Exchange – which was set up and owned by brokers – having made the IPE an offer they couldn’t refuse, i.e. “….accept this offer, or we take our business elsewhere”.

Since then, the ICE has extended beyond energy into other markets, but its core business remains energy.

The Brent Complex
The “Brent Complex” is aptly named, being an increasingly baroque collection of contracts relating to North Sea crude oil, originally based upon the Shell “Brent” quality crude oil contract which originated in the 1980s. It now consists of physical and forward BFOE (the Brent, Forties, Oseberg and Ekofisk fields) contracts in North Sea crude oil; and the key ICE Europe BFOE futures contract which is not a deliverable contract and is purely a financial bet based upon the price in the BFOE forward market.

There is also a whole plethora of other “OTC” contracts involving not only BFOE, but also a huge transatlantic “arbitrage” market between the BFOE contract and the US West Texas Intermediate contract originated by NYMEX, but cloned by ICE Europe.

North Sea crude oil production has been in secular decline for many years, and even though the North Sea crude oil benchmark contract was extended from the Brent quality to become BFOE, there are still only about 70 cargoes, each of 600,000 barrels, of North Sea oil which come out of the North Sea each month, worth at current prices about $2.5 billion. It is the price – as reported by Platts – of these cargoes which is the benchmark for global oil prices either directly (about 60%) or indirectly (through BFOE/WTI arbitrage) for most of the rest.

So it will be seen that traders of the scale of the ICE core membership wouldn’t really have to put much money at risk by their standards in order to move or support the global market price via the BFOE market. Indeed the evolution of the Brent market has been a response to declining production and the fact that traders could not resist manipulating the market by buying up contracts and “squeezing” those who had sold oil they did not have. The fewer cargoes produced, the easier the underlying market is to manipulate.

But note that all of this action was going on among consenting adults, and was pretty much a zero sum game, which explains why the UK regulators responsible for it essentially ignored it, with a “light touch” regime.

Market Strategy
If you are an end user, then market volatility is your enemy – indeed, that is why end users began to use derivatives in the first place. But if you are a middleman, then volatility is your friend, and the only bad news is no news. Likewise, good access to market data is essential to end users – whereas privileged or “asymmetric” access to market data is beneficial for intermediaries.

The temptation is therefore always there for intermediaries to create artificial volatility through “hyping” or even creating news, and to move the market around. Whether or not BP and Goldman Sachs trading arm J Aron were involved in such collaborative behaviour during the late 90s is an interesting point, since they were uniquely well placed, but if they did, they wouldn’t have been the only ones.

Certainly by 2000 manipulation of settlement prices – for the purpose of making trading profits “off exchange” – was rife on the IPE to the extent that the opportunity for profit to which it gave rise was affectionately known by IPE locals as “Grab a Grand”. When I discovered it by chance, and blew the whistle on it, my allegations were buried by the UK’s Treasury, FSA and IPE between them, and so was I, personally and professionally.

Meanwhile, in 1999, Goldman Sachs managed to convince the US regulators, the CFTC, that they were entitled to the same regulatory “hedge” exemptions as those market participants who were genuinely hedging their physical requirements. This, combined with the collapse of Enron in December 2001, cleared the way for the complete takeover of the global energy marketplace which has followed in trading on (and off) the ICE platform, and prepared the ground for making money out of the growing constituency of financial investors.

Financial Investors
Through the 1990s two new breeds of financial investors in the energy markets began to evolve.

Firstly, the inaptly named hedge funds, which recruited, or were set up by, some of the top energy traders, who preferred to make money for themselves rather than their employer oil firms or investment banks. These traders began to take large bets in the oil and energy markets, using investors’ money as risk capital, using both on and off exchange contracts, and as much “leverage” as they could command, either through derivatives, borrowing, or both.

This was good business for the “prime brokers” who acted as counter-parties to hedge funds and benefited both from commission and fee income, but also from privileged knowledge of order flow, superior knowledge of the physical market, and “front running” of customers wherever possible.

The lion’s share of this prime brokerage business went to the ICE founders, Goldman Sachs and Morgan Stanley, who took different approaches to their necessary relationship with the physical market. Morgan Stanley acquired energy market infrastructure, particularly storage, whereas Goldman appears to have relied more upon their close relationship with BP. In the years from around 2002 until the Credit Crunch neutered the hedge funds, BP, Goldman and other prime brokers prospered mightily.

The advent of the Goldman Sachs Commodity Index (GSCI) fund in 1995 was one of the earliest examples of a fund investing in commodities for the long term as a “hedge against inflation”. To do so the fund ran increasingly significant positions in all commodity markets, but weighted towards energy. These positions were held over time, and had to be “rolled over” from month to month in the futures markets either directly, or through the intermediation of J Aron. This resulted in the phenomenon of what John Dizard documented as Date Rape and which I had observed – and pointed out to the FSA – several years earlier.

In the last few years, and particularly in the aftermath of the Credit Crunch, a massive wave of money has washed into a new breed of Exchange Traded Funds (ETFs) some of which exist solely to invest in commodity markets (ETCs). By mid 2008 it was estimated that some $260 billion of such money was invested in the energy markets. Compare that to the value of the oil actually coming out of the North Sea each month, at maybe $4 to $5 billion at most.

No one is in any doubt that this tidal wave of fund money caused a Bubble in oil prices culminating in a “spike” to $147.00 per barrel on 11 July 2008. But there appears to be a complete misconception – particularly in the US – as to how this Bubble occurred, and who was responsible. There is no consensus, and many conflicting theories, as to why it occurred and also why the oil price appears to be held at levels apparently unjustified by supply and demand.

How and Who
In the Summer of 2000 I was interviewed in London by a couple of staffers who were researching the Brent market on behalf of Senator Levin’s Sub-Committee on Investigations, but the Senate then passed to the Republicans in that year’s election and a Minority Report was the result. This political attention to the Brent market pre-dated the assimilation of the global energy market by ICE, and almost the entire influx of speculative investor money into the market.

Current political attention is almost entirely focused on US futures markets, such as NYMEX and ICE, and a supposed “London Loophole” relating to trading on ICE Europe of WTI in particular. There is indeed a London Loophole, but it isn’t where the politicians are looking.

The key point to understand is that for a deliverable futures contract like NYMEX’s WTI, the futures price converges on the physical price, and not the other way around. What matters in terms of manipulation is the exercise of control over physical oil in tank or in transit, in order to be in position for delivery in accordance with exchange rules.

For six years I oversaw the trading and delivery cycle of the IPE’s deliverable Gas Oil contract and can categorically say that neither IPE nor the London Clearing House saw any reason to even consider position limits other than in the month of delivery itself. Even if the Clearing members were negligent or mad, IPE took care to ensure that any of their clients who still had contracts open were in a position to make or take delivery in accordance with the rules. I knew that all of the action, in what was occasionally Europe’s biggest game of “chicken”, was taking place in the physical market between the consenting adults whom I had on my speed dial.

I have no doubt that the manipulation of global energy prices which is taking place does so not on exchanges, but in trading within the Brent Complex where the key transactions take place on the telephone or – in a modern twist – in the instant messaging chat-rooms to which most of the negotiations have migrated.

Some of the resulting contracts are registered and cleared by ICE Europe and elsewhere, but most remain open bilaterally between seller and buyer. So most of the huge volume of transactions which takes place in ICE Europe and NYMEX are in fact “hedges” of the risks taken on by financial intermediaries in these opaque off-exchange transactions. The futures markets are the tail, not the dog: the problem is that the tail can be seen, but the dog is invisible.

BP and Goldman Sachs are, as ever, the best placed, since Goldman has acquired strategic pipeline and other assets in the US which give them an information advantage over other players in the US oil and gas world. BP for their part may have disposed of their North Sea oil interests but they made sure they kept ownership of pipeline and other infrastructure.

I surmise therefore, that the rest of the financial intermediaries who have been queuing up to join the party, dance profitably to BP and Goldman’s tune, and carry out similar transactions as counter-parties to producers and funds based upon the same market logic.

Which brings us to why the market is doing what it is doing. What actually is the logic?

Yield and Profit
At this point I must give a risk disclosure statement. What follows is purely speculation, and based in part upon some unconventional thinking I have come across, and find attractive.

From the perspective of a producer high prices are desirable, and they are hardly likely to complain about market prices being manipulated upwards.

Now the conventional assumption is that the ruling factor for producers in market decision making is the marginal cost of production, i.e. the cost of producing an additional barrel of oil, or tonne of iron ore. But if that were the case, why did all the commodity markets spike at the same time, and indeed, why are they doing so again at the moment, when there have been no obvious cost changes in any of them?

Clearly some other factors are at work here.

Firstly, the profit motive, and secondly, the price of money over time, or “yield curve”.

Unlike for investors, the cost of storage for producers is virtually zero. Because they are in business to maximise profits they will therefore tend to keep their oil in the ground if it is more profitable over time to do so than to sell it and hold the proceeds in financial assets.

As Shalom Hamou puts it:

Quote: Financial decisions are always about choices: the shape of the yield curve is paramount in any financial decision, rather than long-term assets.

Miners and drillers who, contrary to the bankers, have no vested interest in buying long-term assets, prefer short-term assets to long term assets when the yield-curve is inverted. If you consider the minerals as short-term assets, you come to the conclusion that [if] confronted with an inverted yield curve, [one] would prefer to hold minerals in the ground - their most profitable short-term assets. It creates a rise in the price of minerals which comforts them in their behaviour.

Hence, miners would keep a higher proportion of their minerals in the ground where storage is infinite and almost free to them. For a miner, the best short-term asset is minerals in the ground, so selling them in order to buy short-term financial assets is simply not relevant, rather than sell them and invest the proceeds in long-term assets. Because of their self-restraint on output, hence on supply, they generate as the commodity price rises, which is compounded with the increase in their unrealized revenues.

That behaviour need not be conscious but is probably the result of the propagation of arbitrages through the different financial markets, among them the cash and derivative markets on fixed income securities and the cash and futures markets for minerals.

Hamou’s point is, as I read him, that it is the shape of the yield curve which tends to drive commodity prices. And, of course, it is the “propagation of arbitrages” which is the business of the BPs and Goldmans of this world.

Whether and to what extent the yield curve has affected commodity pricing are interesting questions beyond my experience and competence, but the argument is an interesting one.

Returning to market manipulation, market observers with long memories will recall that a cartel of tin producers was able for years to hold the tin price at an artificially high level by buying in production into a pool. Eventually, however, the high price stimulated so much new production that the cartel was unable to support the price and the market collapsed overnight from $800 per tonne to $400 per tonne.

More recently, Sumitomo’s (SSUMY.PK) copper trader Yasuo Hamanaka was able to manipulate the copper market for some 10 years with the complicity of several investment banks and brokers who took part in a programme of lending and borrowing copper through forward sales on the London Metal Exchange. Mike Riess’s brilliant presentation in 2003 is a fascinating study of modern market manipulation.

It appears to me that what has been occurring in the oil market may have been that – through the intermediation of the likes of J Aron in the Brent Complex – long term funds have been lending money to producers – effectively interest-free – and in return the producers have been lending oil to the funds. This works well for as long as funds flow into the market, or do not withdraw in quantity, but once funds withdraw money from the market, there is a sudden collapse in price.

A combination of market hype, the opacity of the Brent Complex and the relatively small scale of trading of the benchmark BFOE crude oil contract enabled the long run up in prices, and several observers believe that the dramatic spike to $147.00 per barrel was the specific outcome of the collapse of SemGroup which that company’s management subsequently blamed mainly on Goldman Sachs.

To quote Riess:

Quote:Before the ‘80s, there were just us traders. Rogue traders arrived on the scene with the large institutional participants, both private and public. Today’s companies and government marketing boards are large enough for senior management to distance itself from controversy, including market manipulation.

In a competitive, amoral environment, middle managers in these mega-organizations have the authority to hijack an institution’s reputation and the financial clout to manipulate the market—and they do. As long as they succeed, they enjoy promotions and perks and, sometimes, the fruits of embezzlement. If the manipulation unravels, the company denies any knowledge and hangs the rogue out to dry. We’ve seen this over and over again, most recently with D’Avila and Codelco, Hamanaka and Sumitomo, Leeson and Barings and Tsuda and Daiwa Bank.

The manipulation in the oil market is taking place at a different “meta” level to that of the Leesons and Hamanakas. The Goldman Sachs and JP Morgan Chases (JPM) of this world do not break rules: if rules are inconvenient to their purpose they have them changed.

The Market is the Manipulation.

What is to be Done?
The dysfunctional nature and inherent instability of today’s market is a combination of the profit motive of trading intermediaries, and the “deficit-based” nature of money created as interest-bearing credit.

I believe that the solution lies in the evolution of a new – dis-intermediated – market architecture and a simple but radical approach to the financialisation of oil and energy through what I call “unitisation”. This is the simple expedient of the creation and issue by producers of Units redeemable in energy, whether carbon-based or otherwise.

The evolution to such an architecture will in my view be a consequence of the direct instantaneous connections of the Internet. But that emergence is another story.

[FastTadpole]

ICE invloved in Emissions trading since April 2005. Pumping up another commodity out of thin air ..

Quote:ICE Futures Europe EMISSIONS TRADING ERU Contracts

ICE ECX ERU Futures and Options contracts, the market's first Emission Reduction Unit (ERU) contracts available November 8, 2010. Learn More (PDF)

Overview

Through its ECX product suite, ICE Futures Europe is the leading global marketplace for trading carbon dioxide (CO2) emissions.

ICE Futures Europe currently offers derivative contracts on three types of carbon credit: ICE ECX EU allowances (EUAs), ICE ECX Certified Emission Reductions (CERs) and the world's first ICE ECX Emissions Reductions Units (ERUs).

These emissions products were first traded in April 2005, with the launch of futures on EUAs. EUA options were listed the following year. Similar contracts on CERs were introduced in 2008, with Daily Futures (spot) contracts on both underlying products added in 2009. The latest launch of ERUs will provide price discovery and transparency for the ERU market, enabling market participants to manage their carbon price risk more efficiently with EUAs, CERs and ERUs on a single platform.

CO2 emissions trading volumes have experienced strong growth. In 2009 volumes surpassed 5 billion tonnes of CO2 and equivalent, and 2010 volumes passed the 5 billion tonne mark early in the second half. Over 100 global businesses are members for trading ICE ECX emissions products, in addition to the several thousand traders around the world with access to this market via clearing members and brokers.

https://www.theice.com/productguide/Prod...groupId=19

Related Chicago Climate Exchange Absorbed by ICE
Chicago Climate Exchange: In Depth Profile.
http://concen.org/forum/showthread.php?t...#pid202646

[wandaschmick]

"Clearly, manipulation has been going on in the global market in oil "

I totally agree, it is clearly manipulation so that are the only one can profit.

-----------
The Moroccan Cabana Chair

[FastTadpole]

Lack of regulation isn't the solution. Enforced management by proxy of the collective hive-mind interpreted by the hierarchy on our/your behalf of will is but a band-aid to viral greed and lack of respect for thy fellow man woman and child (and oil covered waterfowl).

Oil and ~98% of commodities is a cartel in league with the banks, government, media ...

Commodities, to borrow a bit from a valid observation of Marxist economics, are the fruits excess labour that are exchanged for profit. The speculative trading of commodities is herd mind controlled and manipulated via leveraged cartels to effectively fix the price and effect policy on the supply market. Production is also controlled artificially creating scarcity and excess supply. The medium of exchange is set in currency and there is a centralization of that aspect as well with the ability to expand and contract the money supply. Government via taxation, law, regulation enforcement, and direct funding can favour enterprises selectively. Education embeds a skill set to control supply of labour itself - in tandem with union busting tactics and global outsourcing the supply of human resources are controlled as well. Although not as prevalent in commodity market, information is privileged and brokered through patents and regulation. All of the above (I may have missed some aspects) are commodities manipulated directly, by proxy, by mind control and the supply demand curve.

To use a video game metaphor n00bs don't stand a chance when the spawning points are guarded by high level PKers waiting for them.

Nice game. Well played y'all.

Solution(s): Follow Natural Law: No Cannibalistic Monopolies at any point in the cost supply chain, Informed & Aware Consumers not that can transcend the mind manipulation, Abolish Rule by Force, Defend principles when they are violated, Personal Accountability and Responsibility. Respect for your fellows. Respect for your ecology. Respect for yourself.

The solution/results debate needs to shift away from the ideological to more of a philosophical based discussion to establish the core principles of how we want to interact with our world and eachother.

We can't hope to build a ladder out of this state using the same toolset that conjured the current situation. Hierarchical and compartmentalized structures act as a barrier to prevent us from realizing the fractal nature of the organism in which we exist to enact self initiated progress from individuals that will extend to the entirety of our common existence.

Thought + Reflection >> Discussion >> Action

[Naturalmiztic]

(12-28-2010 04:49 AM)FastTadpole Wrote:  Lack of regulation isn't the solution... Enforced management by proxy of the collective hive-mind interpreted by the hierarchy on our/your behalf of will is but a band-aid to viral greed and lack of respect for thy fellow man woman and child (and oil covered waterfowl).

Oil and ~98% of commodities is a cartel in league with the banks, government, media ...


Solution(s): Follow Natural Law: No Cannibalistic Monopolies at any point in the cost supply chain, Informed & Aware Consumers not that can transcend the mind manipulation, Abolish Rule by Force, Defend principles when they are violated, Personal Accountability and Responsibility. Respect for your fellows. Respect for your ecology. Respect for yourself.

...
We can't hope to build a ladder out of this state using the same toolset that conjured the current situation. Hierarchical and compartmentalized structures act as a barrier to prevent us from realizing the fractal nature of the organism in which we exist to enact self initiated progress from individuals that will extend to the entirety of our common existence.

Thought + Reflection >> Discussion >> Action

So true... the system of review and regulation like senate enquiries is so cyclical, and embedded within the false economy/cartel, so called experts, from industry, or academia, who make submissions are brainwashed or greedy. Any regulations just perpetuates the problems.
I hope for philosophical change, brought about by more people becoming empowered through learning. Maybe as the energy market place changes with less dependency on fossil fuels and consumers become free from the cartel, more and more will wake up and truly see how the oil and coal industries are hurting our planet. Sometimes in non-repairable ways, which is priceless.