Manipulation investigations could burst 
      commodity bubble

By Neil Behrmann


June, 2008:- US and international regulators are conducting a major investigation into alleged manipulation of the oil market . They have broadened the enquiry into activities in agricultural commodities.

The enquiries are the result of the surge in crude oil prices from around $55 a barrel early 2007 to a peak earlier this week of $135. The price is currently trading around $127. In the previous economic downturn in 2002, oil quotes were only $19 a barrel. Such is the scope of the criminal investigation that it could encourage big time speculators to withdraw from oil and other commodity markets, leading to price declines. An investigation into copper and other commodity manipulation has been in place for some time. So far the miscreants haven’t been indicted. Some players who are believed to be involved, have donated money to Presidential candidates.

The Commodities Future Trading Commission (CFTC) said that it is working closely with other international regulators including the UK Financial Services Authority (FSA). It did not mention Singapore authorities specifically, but oil traders believe that they are involved in the investigation, given the importance of the oil trading and shipping centre. According to sources, the US Justice Department, Federal Bureau of Investigations and intelligence agencies are also conducting ongoing enquiries into international criminal manipulation of global energy markets.

Conspiracy Theories possible, but unproven

The investigations follow extensive speculation of energy and other hedge funds, bank proprietary traders and large scale pension fund allocations into so called commodity index products that place a large proportion of their weighting in oil. Some traders and analysts fear that given the scale of speculative funds pouring into the markets, Iranian, Russian and other state controlled corporations could be involved. These allegations, including the conspiracy theory that terrorist organisations are pushing up energy prices to cripple economies, have neither been confirmed nor proven.

The CFTC said that that it began its investigation in December, taking what it called the "extraordinary step" of disclosing the probe "because of today's unprecedented market conditions". The enforcement inquiries were focused on "ensuring that the markets are properly policed for manipulation and abusive practices".

“In addition to the CFTC's ongoing examination of the role of fundamental economic forces and new investors in the recent commodity market price increases, the agency continues to pursue one of its primary missions - to deter, detect and punish futures market manipulation,” said Walt Lukken, acting chairman of the CFTC.

The FSA has signed an agreement with the CFTC, and with ICE Futures Europe - which runs the leading European energy exchange from London - to agree to share surveillance information for crude oil trading, including data on contracts based on West Texas Intermediate (WTI) oil that are traded in London. The FSA has been sharing information with the CFTC under the terms of a 2006 agreement "to assist in the detection of the potential abuses or manipulative trading practices that involve trading in related contracts on UK and US derivative exchanges".

The CFTC says that the open interest of WTI futures and options on tbe New York Mercantile Exchange was around 2.8 million contracts equivalent to 2.8 billion barrels of oil. The net long positions of hedge funds and CTA’s was around 99,000 contracts on May 27, down from  a peak of 141,000 on May 6, this year. The reduction began when the US Congress began looking into oil speculation.

Over the Counter Operations key to uncovering nefarious activities

There is also huge speculative activity on the over the counter market (OTC), traders say. According to the Bank For International Settlements, the notional value of OTC commodity swaps and other derivatives was $9 trillion at the end of December 2007.  This compares with $1.4 trillion in 2004. The majority of these derivatives relate to oil and other energy products. The CFTC, FBI and others will have difficulty in uncovering these untransparent transactions. A Neue Zurcher Zeitang report estimated that about 50% of the transactions are routed through Switzerland.

The latest International Energy Agency report shows that there is no shortage of oil. In March global oil supplies of around 87.3 million barrels a day, were marginally more than physical demand, which fell during the month. Global oil inventories of Organisation For Economic Cooperation & Development (OECD) nations amounted to 4.1 billion barrels of oil, equivalent to 83 days demand. This includes government strategic stockpiles of around 1.5 billion barrels. In terms of an IEA agreement, strategic stocks cannot be used to counter speculation.

George Soros said earlier this week that the oil price “has this parabolic shape which is characteristic of bubbles". Several investment bank oil analysts, however, believe that oil prices will continue to surge, possibly to $200 a barrel. Our view is that the culprits have taken a step too far and will slip in the bubble's oil puddle.

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                       Fundamentals do not back up these oil prices        

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