Crude Oil Prices Could Be Easily Manipulated

Crude Oil Prices Could Be Easily ManipulatedCommodity News Center ^ 5-29-2008 Alison Simard
http://www.freerepublic.com/focus/f-news/2028536/posts
Posted on Monday, June 09, 2008 7:15:07 PM by Entrepreneur
Crude Oil Prices Could Be Easily Manipulated; Helped By Ridiculously Low 7% Margin Requirement for Oil Futures. We Don't Know That Oil Prices Are Being Manipulated, But They Could.
The ridiculously low 7% margin requirement for crude oil futures contracts means that oil producers, big or small, could easily be manipulating the price of oil for their own benefit. That's not to say that pension funds and other hedge players aren't also going steadily long crude oil and other commodity futures. But it is in the obvious self interest of oil producers to have an ever rising price of crude.
For example, suppose the "players" who run Russia (or Iran, or Venezuela or any major or minor producer) decided a year ago to invest $200 million per month as margin to go long oil futures. Margin of $200 million could control as many as 25,000 contracts at $8,000 per contract, which would be equal to 1.3% of notional open interest.Wouldn't adding 1.3% each month to the 1.9 million contracts of notional open interest be enough to produce the crazy oil market that exists now?
Publicly available sources indicate that Russia produces 9.4 million barrels of oil per day, Iran 4.0 million bpd and Venezuela 3.0 million bpd. The increase in oil prices from $60 per barrel to $130 per barrel in the past year for Russia alone has translated into an additional $20 billion per month (9.4 million barrels per day * 30 days per month * $70 increase per barrel = $20 billion). Not only would higher prices mean more cash now but also higher values for what's left. Let's not forget that someone who bought $2.8 billion worth of oil last year at $60 per barrel using $200 million in margin is sitting on a profit of over $3 billion per $200 million investment.
We have no evidence of any kind that oil producers are pumping up oil prices, but they could. If we were producing millions of barrels per day of oil, we would consider going long oil futures, putting up $1 to control $14 dollars of crude, to ensure that prices keep rising.
Our Modest Solution to Oil Price Spike: U.S. Should Divert Money Saved from Ending Strategic Petroleum Reserve Purchases to Go Short Oil Futures.
One obvious way to burst the oil bubble would be to boost the margin requirement for oil futures. Since exchanges and brokers earn big bucks from trading lots of contracts, we therefore doubt margin requirements will be boosted any time soon.
But there is another way to bring the oil mania under control. If it is logical for oil producers to go long oil futures to enhance the future value of their remaining oil, why is it not logical for oil consumers to go short oil futures? Japan, are you listening?
The U.S. recently suspended its daily purchases of 70,000 barrels of oil for the Strategic Petroleum Reserve. Why not use the savings of roughly $275 million per month to short oil futures (70,000 barrels per day * 30 days per month * $131 per barrel = $275 million)? That $275 million would be enough to short 34,400 contracts per month. The U.S. has more than 700 million barrels of oil in the Strategic Petroleum Reserve, which is about 1/3 the notional open interest of oil futures. In essence the U.S. would be offering to sell at a high price the crude it bought at much lower prices. For the future, would the U.S. be better off with lower oil prices or more high-priced oil in salt caverns?
The TrimTabs-BarclayHedge Hedge Fund Flow Report indicates that $1 billion per month flowed into commodity hedge funds in the first three months of 2008. If half of that $1 billion, or $500 million, is invested in oil futures, it is enough to go long 62,500 contracts, which would be equal to 3.3% of notional open interest. But what if oil users shorted enough contracts to counteract that $500 million?
The world consumes 85 million barrels of oil per day. At $131 per barrel, the world is paying $11 billion per day, or $334 billion per month, to oil producers. If oil prices fell back to $80 to $90 per barrel--prices at which almost all alternative energy schemes are profitable--the world would save $105 billion to $129 billion per month on its oil bill. Is that savings not worth shorting $500 million in oil futures per month?

How US is manipulating oil prices, and how UPA still wants to embrace it

How US is manipulating oil prices, and how UPA still wants to embrace it
Written byNilotpal Basu
http://indiainteracts.com/columnist/2008/07/05/How-US-is-manipulating-oil-prices-and-how-UPA-still-wants-to-embrace-it/
India seems to be moving through one of the most bizarre phases of its history. The common man – aam admi – is reeling under the heavy burden of high rates of inflation not seen in recent times. The leaders of the UPA coalition openly admit that come Friday – they shudder at the prospect of burgeoning inflation figure which shows no signs of respite. And despite that, the obsession with nuclear deal goes on with an air of insensitivity which has very few parallels? The global crude oil price is being touted as the villain of the piece. However, one is little amused; because, the big guns of globalization are also complaining of outcomes that result from that very process. There is now incontrovertible proof that speculative investment is a principal feature of the globalization process which was underway since the early–mid seventies. Oil prices' skyrocketing is a phenomenon which is increasingly smacking of being the handiwork of international finance capital that is increasingly turning to trading in oil futures. This came to be sharply highlighted in the international conference on oil prices in Jeddah on June 22. This conference attended by 36 countries, registered the presence of all important players who have a stake in the global oil economy. Organized by Saudi Arabia – one of the closest US allies in the region – it fell on King Abdullah, the monarch of the kingdom to fire the first salvo. He thundered against "…..speculators who played a market out of selfish interests". The other big gun – OPEC President Chakib Khelil – directly charged US and its financial sector for the current spread of crude oil price – which has risen from US $ 70 in August '07 to more than US $ 140 a barrel now. Khelil hinted the nature of complicity and observed: "A lot of people are talking about the uncertainties about the (oil) reserves. But what about the uncertainties on the dollar?" What are the reasons for this inference on speculative nature of the crude price hike? The first indication that something unusual is happening in the oil market comes out from the fact which The Economist has pointed out - that with the 20-fold increase since 2003, investment in oil futures have gone up to US $ 260 billion. This abrupt increase is triggered by the nature of trading of oil futures. Unlike margin requirements for stocks – upto 50 per cent – the margin here in commodities is a mere 5 to 7 per cent. With US $ 260 billion, financial sector speculators can take positions of US $ 5 trillion in the futures market.
Further, oil is internationally traded in New York and London and denominated in US dollars only. Price fixation in crude has, therefore, shifted away from OPEC to Wall Street. And, behemoths like Goldman Sachs, Citigroup, J P Morgan Chase and Morgan Stanley now rule the roost. A US Senate Sub-Committee report from June 2006 blamed the speculators squarely for the rise in oil prices. The report estimated that speculative purchases of oil futures had added as much as US $ 20-25 per barrel to the then price of US $ 60 per barrel. In the present context of US $ 140 per barrel would imply a neat US $ 100 to 105/barrel! And, no doubt, the US government has acted as a facilitator in this obnoxious process which now hurts the aam aadmi in India and elsewhere in the world. Oil is a unique commodity where increases in production and supply do not appreciably bring down its prices. But a slight increase in demand triggers a quantum jump. Till 2006, the US strategic oil reserves were 350 million barrels. Within the last year and a half, this has doubled to 700 million barrels. One can imagine the impact of this in adding pressure on demand and the consequent prices. It is the US treasury which has borne US $ 35 billion for building up this additional stock. The same Senate Sub-Committee report of 2006 has also pointed out that the US administration has left loophole in the US regulation for oil derivatives trading which could allow even a `herd of elephants to walk through it'. At the behest of now defamed energy major Enron, the administration inserted a provision into the commodity futures modernization act of 2000. This amendment ensures that Commodities Future Trading Commission (CFTC), the US regulator for commodity futures market, which was earlier overseeing this futures trade will not exercise oversight of trading of contracts in OTC (over the counter) electronic markets. With this amendment, overwhelming volume of oil futures trade goes on unregulated in such OTC exchanges. That brings us to Jeddah. And wonder of wonders! Taking on Samuel Bodman, the US Energy Secretary, who insisted "there is no evidence that we can find that speculators are driving futures prices"-was our own home-grown globaliser,P.Chidambaram. The Indian Finance Minister who refused to implement the recommendations of an Indian Parliamentary committee and ban futures trading in 25 agri-food commodities gunned for the oil speculators' blood! The question that people will ask, will the 'spine' that was displayed in Jeddah remain unaffected by the strategic embrace with US administrations?