May 25, 2011

CFTC: The Cross Market Oil Trading Scheme of 2008 (Guest Post)

By Bob van der Valk

The gated community of Rancho Santa Fe has not seen so much excitement since Michael Blevins, owner of now defunct diet pill maker Metabolife, was the center of attention after being accused of federal tax evasion in July 2002. On Tuesday, May 24, 2011 the Commodity Futures Trading Commission (CFTC) charged three oil companies and two individuals with manipulating crude oil futures.

The name of one of the accused, of being an oil speculator, is Nicholas J. Wildgoose, who operates Parnon Energy of California at Rancho Santa Fe, CA and advertises his crude oil trading and marketing expertise on a website.

The alleged price manipulation of WTI crude oil took place in the first four months of 2008. The following chart, compiled by Michael W. Masters, Masters Capital Management and Adam K. White, White Knight Research & Trading, shows the wild price gyrations:

Prices go up, when index speculators pour large amounts of money into the commodities markets and buy large amounts of futures contracts. The inverse happens, when they pull large amounts of money out by selling large amounts of futures contracts. These large financial players are the primary source of the recent dramatic volatility in crude oil prices.

The CFTC complaint alleges that Parnon took part in a cross-market trading scheme in 2008 with two other companies involving the accumulation and sell-off of "a substantial position in physical crude oil" to manipulate futures prices and made an illegal profit of $50 million.

This is a civil not a criminal enforcement action filed in the U.S. District Court for the Southern District of New York. It states that from January through April 2008, the participants traded futures and other contracts that were priced off of the WTI crude oil posting and manipulated the price in order to obtain their illegal profits.

The three companies would first purchase large quantities of physical WTI crude oil barrels without any intention of shipping them into their Cushing, OK storage tanks.

According to the civil lawsuit it is alleged they did so "pursuant to their scheme to dominate and control the already tight supply" at Cushing to manipulate the price of WTI higher and profit from the increases in WTI futures and options. They allegedly also bet short on the WTI instruments at artificially high prices. They would then sell off their physical holdings of WTI "mostly on one day" to drive the WTI price back down and profit from their "short WTI derivatives" bets.

The two individuals and three companies are being sued to disgorge their illegally made profits of $50 million dollars and may be fined an additional $150 million if found guilty.

None of the oil traders on the West Coast have heard or done deals with either Nick Wildgoose or Parnon.

About the Author - Bob van der Valk is a Petroleum Industry Analyst with over 50 years of experience.  You can reach Bob at: tridemoil@aol.com or (406) 853-4251

The views and opinions expressed herein are the author's own and do not necessarily reflect those of EconMatters.

EconMatters, May 25, 2011 | Facebook Page | Post Alert | Kindle