by Mike Whitney / June 2nd, 2008
The 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 that 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. ($126 per barrel today) The decline of the dollar against gold and oil suggests a US monetary that is supplying too many dollars.”
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 eight 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 on Friday:
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. 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. Emphasis mine.)
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?
Mike Whitney lives in Washington state
http://www.dissidentvoice.org/2008/06/the-great-oil-swindle/
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The Trade That Brought Us $100/bbl Oil Teaches Us to Be Afraid, Be Very Afraid
by Raymond J. Learsy Posted January 7, 2008
On January 2nd a single trade on the New York Mercantile Exchange pushed the price of oil to the psychologically freighted $100 a barrel. That trade made newspaper headlines or the front pages of newspapers throughout the world.
The trade itself was for a single futures contract of 1000 barrels of crude. The price quotation on the exchange prior to the fateful $100 trade was $99.53 so that the when that one contract at $100/bbl crossed the ticker, it jumped the market price of crude oil everywhere by nearly one half percent or 47 cents per barrel to be exact. At that moment that was the price on which all transactions of crude oil were based. The next trade on the exchange, that is the price at which the $100 contract could have been immediately resold, would have incurred a trading loss of $600 to the trader who executed the trade, understood to be one Mr. Richard Arens. Thus Mr. Arens, by being the first trader to have closed a $100/bbl trade on the NYMerc purchased a slice of immortality at a cost of but $600.
But then consider the following. By making that trade at some fifty cents above the going market Mr. Arens, by himself with an an investment of $6750, the margin required by the exchange for an oil futures contract, was able to move the market dramatically. At that moment of time and as long as the $100 marker was on the trading board, all oil produced, or shipped, bought or sold in the United States and given their close interrelationship, on markets throughout the world, that forty-seven cent jump was reflected in virtually all transactions. With some 85 million barrels of oil being produced and shipped each day, that trade alone increased the value of oil by over $40 million at that moment in time. All that based on one trade, requiring only $6750 as a margin deposit. An incredible and frightening degree of leverage. Thus we have been shown the clearest, most up to date, real time example of the risks inherent in basing the world price of oil on the vicissitudes of the commodity trading floor.
On these postings I have repeatedly tried to alert the field that the trading in oil futures on world commodity exchanges (electronic, New York , London, Singapore and on) is not a straight forward, unencumbered market (Please see "Energy Trading Oversight Awakens From Its Slumber With Anticipated BP Settlement" 10.25.07; "Oil Prices Pushed Ever Higher By Manipulating Oil Futures Trading", 04.05.06). That it is riddled with special interests (pushing up oil prices to levels as high as they will be tolerated) and oil patch agendas, or as in this case, reaching for an historic breakthrough. This argumentation has been met with considerable skepticism by the press ("the market sets the price") and outright hostility by those who have a vested interest in high oil prices, the oil industry and its friends in government.
Yet here is a prima facie evidence of the of the susceptibility by the commodity trading markets to play out specific agendas, and the ability of the trading markets to facilitate those agendas. Mr. Arens, with one oil futures contract representing 1000 barrels of oil, necessitating a deposit of only $6750, was able to bullseye the $100/bbl mark.
Now consider the following. Saudi Arabia, Kuwait, the United Arab Emirates, Russia all have Sovereign Wealth Funds. Saudia Arabia alone has $900 billion to invest, or to trade or to go dancing with. We don't know how these funds are spent or invested, because their activities and goals are completely opaque. The exception being when a Citigroup or Merrill Lynch go knocking at their door. For these countries oil is the core of their economy, and the higher the price of oil, the fatter those Sovereign Wealth Funds. It is the price of oil on the commodity exchanges that determines the price at which the physical product is bought and sold. Is it then unreasonable to assume, given the market's susceptibility to direction, as witnessed by that first $100/bbl tick, that a portion of that ocean of money in the hands of the world's most important oil producers is being used to trade oil prices toward the highest levels that the world's oil consuming economies can either bear or tolerate. What I'm trying to say in a perhaps overly long winded way, if a single trader with only $6750 can move the market, how can you expect those with billions at their disposal not to do the same as well!
It is long overdue that our government institutions, preferably conjointly with their international counterparts, take a seriously close look at commodity trading practices as they are currently structured. This to determine the likelihood and extent of manipulation, and the cost of that manipulation to the world at large. Somehow we must find ways to bring these markets back to becoming accurate and honest price mechanisms, reflecting real supply and demand. Otherwise we are participating in a game of loaded dice with purveyors of a basic commodity that exerts enormous influence on our fiscal, environmental and social well-being. Certainly anything less than a fully hands on, transparent, and effective oversight, will inevitably portend economic, social and environmental disaster.
Be afraid, be very afraid!
http://www.huffingtonpost.com/raymond-j-learsy/the-trade-that-brought-us_b_80149.html
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