SPECULATORS CONTROLLED 81% OF OIL FUTURES MARKET!

An investigation of the oil futures commodity market found that a few big players at one point controlled over 80% of the oil futures market.

The biggest single piece of information verifying the general trend of speculation in oil futures and how it impacted prices was uncovered, in a superb piece of investigative reporting, by David Cho of the Wsshington Post. It involved Vitol, a Swiss company.

The Commodity Futures Trading Commission (CFTC), the oil futures regulators, responded to pressure exerted by Congressional hearings on speculation by starting the investigation. In it, they looked into Vitol, a company they thought had been buying oil to supply other oil-consuming companies.

The investigation revealed Vitol was buying oil futures contracts almost entirely as paper investments. Acting as a “bettor” in a market designed for oil “consumers” is not illegal but it skews the market, creating exactly the kind of volatility the market was created to dampen for users of economy-impacting commodities like oil.

Rep. Bart Stupak (D-Mich.): "…legitimate businesses that hedge and take physical delivery of oil are being trampled by the speculators who are in the market purely to make profit."

From David Cho's Washington Post reporting: On June 6, Vitol controlled 57.7 million barrels of oil (3 times the U.S. daily consumption), at an estimated cost of ~$1 billion. Oil prices jumped $11/barrel that day. The math: A $634,700,000 profit for the day. 63% return. One day. Nice work if you can get it.

The CFTC study did not name Vitol. Cho's investigative reporting identified it. Vitol declined comment. It’s website touts $100 billion/year revenues from energy-trading.

The CFTC investigation has so far found that, according to Cho, “…financial firms speculating for their clients or for themselves (“swap dealers”) account for about 81 percent of the oil contracts on NYMEX, a far bigger share than had previously been stated by the agency…”

And the CFTC is not finished investigating.

Speculators most likely started backing out of oil futures when Congressional hearings put pressure on the CFTC to investigate because that’s when prices started dropping.

Point 1: The “do-nothing” accusations leveled by Republicans at the Democrat-controlled Congress now ring especially hollow. House Republicans continue to make noise about a vote on oil drilling that will do nothing about gas pump prices but only serve the wallets of their masters in the fossil fuels industries. House Democrats’ investigation of oil futures speculation has resulted in oil prices dropping from $140/barrel to $115/barrel, with an equally dramatic impact at the pump. (Seems like the more wrong the politicians are, the more they rant.)

Point 2: The CFTC now becomes another in a long line of federal agencies (think FEMA) that, during the Bush administration, should be ashamed of its performance. Rep. John D. Dingell (D-Mich.), chairman, House Ways and Means Committee: "[It's] difficult to comprehend how the CFTC would allow a trader [to get 11% of the market] and not scrutinize this position any sooner."

For almost 100 years, only users of commodities were allowed to buy big quantities. In 1991, regulations began easing.

The Commodity Futures Modernization Act of 2000 created the “Enron loophole,” allowing investors to trade energy commodities on private electronic platforms where regulation was thin.

Overseas electronic markets have thinned regulation further, opening the door to big brokerages, swap dealers and the hedge funds, pension funds and big players that came with them.

Michael Masters, hedge fund manager, testifying to the Senate: "[This could eventually drive commodity prices up and] have catastrophic economic effects on millions of already stressed U.S. consumers."

Something to look forward to: The CFTC will allow U.S. oil contract trading in the soon-to-open Dubai exchange. Vitol is among the major investors. Should be quite a show.

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A Few Speculators Dominate Vast Market for Oil Trading
David Cho, August 21, 2008 (Washington Post)

WHO
Vitol; Commodity Futures Trading Commission (CFTC) (R. David Gary, spokesman); New York Mercantile Exchange (NYMEX); Swap dealers; Rep. John D. Dingell (D-Mich.), chairman, House Ways and Means Committee

WHAT
A CFTC investigation, forced by pressure from Congressional hearings, found oil futures speculators account for 81% of NYMEX oil contracts.

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WHEN
- At a point in early July, Vitol alone held 11% of the oil futures contracts traded on NYMEX.
- June 6: Vitol controlled 57.7 million barrels of oil, 3 times the daily U.S. use. The price of oil jumped $11.
- 2003 commodity market: $13 billion
- 2008 commodity market: $260 billion
- Predicted commodity market: $1 trillion

WHERE
- The oil futures trading studied was done on NYMEX and in other oil futures trading markets.
- Vitol is based in Switzerland.

WHY
- CFTC had believed Vitol’s oil purchases were in service to industrial companies that consumed oil.
- CFTC practices prevented its report from naming Vitol as the subject of its investigation. Vitol’s identity was revealed in the Washington Post report.
- Swap dealers invest for and hold contracts for big paper investors (hedge funds, pension funds, rich players). They act behind the scenes, doing anything they can get away with to build big holdings. They often play more than one commodities market and have worked one market against another.
- Using swap dealers, big money has come into commodity markets in general. The money went to oil in the last year and prices took off.
- From the CFTC report: At the end of July 2008, 4 swap dealers held 1/3 of all NYMEX oil contracts for price increases.

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QUOTES
- Rep. John D. Dingell (D-Mich.): "It is now evident that speculators in the energy futures markets play a much larger role than previously thought, and it is now even harder to accept the agency's laughable assertion that excessive speculation has not contributed to rising energy prices…"
- R. David Gary, spokesman, reading CFTC statement: "To date, the CFTC has found that supply and demand fundamentals offer the best explanation for the systematic rise in oil prices…Regardless of their classification . . . the CFTC's market surveillance group scrutinizes daily the positions of all large traders, both commercial and non-commercial, to guard against market manipulation."