- MarketBeat (WSJ Blog) – How to Manipulate the Oil Market for Just $1 Billion
One of the striking things about the CFTC case alleging oil-market manipulation is how little money the CFTC suggests was involved, which would seem to make such a scheme remarkably cheap to run…At the time Arcadia et al were allegedly building this position, Cushing crude oil cost about $93 a barrel. So ostensibly it cost about $428 million to buy up enough physical crude to manipulate the market. When the defendants allegedly took their second bite of the apple, in early March, according to the complaint, they amassed 6.3 million barrels of crude. At the time, Cushing crude cost an average of about $107 a barrel, so 6.3 million barrels would have cost about $674 million. So, if I’m interpreting this correctly, the complaint alleges Arcadia et al spent about $1.1 billion to corner the market in physical crude at Cushing, and that was enough to rack up a $50 million illicit profit. That seems like kind of a long walk for a 5% return, is my first thought, although if it’s possible to use leverage to amass such a stockpile, then it could become markedly easier and more profitable. My second thought is that, if we assume for the sake of argument that even the concept alleged here is realistic, that relatively small operators could accomplish corner the WTI crude-oil market with just $1 billion, then how easy must it be for far larger players to manipulate the market for even greater gains? Am I missing something here? - The Financial Times – Lex: Oil: you can’t prosecute foolishness
At last, at long last, those nefarious speculators are being made to pay for sky-high energy prices. In other news, crude oil rose again today…Try as they might, agencies such as the CFTC cannot track down Messrs Supply and Demand in order to serve charges. Ditto for Messrs Fear and Greed and, lest regulators anger the Congress that sent them on such quests, they did not even try to go after Mr Flawed Energy Policy. The trumpeted “nationwide crude oil investigation” will do no more to control high pump prices than charges against analyst Henry Blodget did to resurrect losers such as Pets.com or those against Angelo Mozilo did to help holders of no-money-down “liar loans”. Human foibles and political cowardice encouraged people to drive hulking cars, buy dotcom stocks and take out excessive mortgages. Crimes were committed on the way, but foolishness cannot be prosecuted. It is human to ask for someone’s scalp when things turn out badly. Count on elected officials to work overtime on the case. Just don’t expect them to solve the problem.
Comment
The second article above perfectly sums up the battle against “evil speculators.” Speculators are an easy scapegoat when markets go haywire, but excessive speculation is a very difficult accusation to prove.
For example, the first article above estimates that Arcadia spent roughly $1.1 billion in an attempt to corner the crude oil market. Assuming there are roughly 60 million barrels of crude oil tradeded every day at an average of $100/barrel at the time Arcadia bought, this would mean the crude oil market totaled approximately $6 billion a day. In other words, Arcadia cornered roughly one-sixth of one days total market value. This was enough to manipulate prices over a period of several weeks?
Is this enough to consider Arcadia an evil speculator? We have no idea, and it seems as though the CFTC will have a difficult time pinpointing the laws that were broken as well. When all else fails, evil speculators can simply be charged with disruptive trading, a catchall accusation that is equivalent to disorderly conduct for regular citizens.