The papers all play up the big news that Commodity Futures Trading Commission lawsuit is accusing three companies of helping cause the oil spike of 2008 by illegally cornering the market on physical crude oil.
The New York Times and Financial Times signal this is big news by putting it on page one. The Wall Street Journal plays it atop Money & Investing. This is one of those days when the business paper of record probably could have put the general news about Mubarak inside.
Here’s how the NYT explains the CFTC allegations:
The suit says that in early 2008 they tried to hoard nearly two-thirds of the available supply of a crucial American market for crude oil, then abruptly dumped it and improperly pocketed $50 million.
That crucial market is for West Texas Intermediate crude in Cushing, Oklahoma (fun fact: home of ye olde Chittum family farm for seventy-plus years), where major oil pipelines meet and oil is stored. Basically, the CFTC says these companies in Switzerland, Australia, and the U.S. and two individuals, an American and an Australian, conspired to corner the market in physical oil to make money off derivatives.
The Journal’s Mark Gongloff has a smart MarketBeat blog post raising questions about what the news means. He points out that if the CFTC is correct then these traders were able to manipulate the price of oil for almost nothing, cornering the market in Cushing by buying just 4.6 million barrels of oil at one point. That cost them just $428 million to move prices in a massive and liquid market.
My second thought is that, if we assume for the sake of argument that even the concept alleged here is realistic, that relatively small operators could accomplish corner the WTI crude-oil market with just $1 billion, then how easy must it be for far larger players to manipulate the market for even greater gains?
Kevin Drum had the same thought last night:
There must be thousands of hedge funds, investment banks, PE funds, or private investors who could pull off something like that. And the operation itself wasn’t exactly rocket science. I had no idea that manipulation of something the size of the oil market was so easy.
Talk about a market failure: A market as liquid as crude oil is taking critical supply signs from a few million barrels chokepoint in Cushing, Oklahoma? Here’s how the Journal explains that bottleneck:
Early in 2008, supplies in Cushing hit their lowest level since 2004, around 15 million barrels, making them especially sensitive to signs of a shortage.
Cushing’s storage tanks are key because they are the delivery point for the main oil-futures contract traded on the Nymex, the world’s most heavily traded oil contract and the benchmark off which much of the world’s oil is priced.
The timeline of the scheme is interesting, too. Remember that the Bush CFTC testified in September 2008 that speculation didn’t play a part in the oil spike. One of Bush’s appointees later said the data it relied on was “deeply flawed,” and Obama’s CFTC reversed the finding in 2009. Now we know the Bush CFTC was investigating this price-manipulation scheme as early as April 2008.
Some questions that arise from the timeline: Why did it take more than three years to sue these traders for what looks to be a clear plot to manipulate the market? Why didn’t the CFTC take such evidence into account before clearing speculators in testimony to Congress several months later?
Here’s another very interesting part of the timeline. The CFTC says the plot started in late 2007. It just happens that the Journal had an excellent page one leder by Ann Davis in October 2007 on Cushing and how speculators were upending the oil bidness there.
Look at this:
The traders and producers pay particular attention to oil levels in Cushing, which holds 5% to 10% of the total U.S. crude inventory. Cushing provides clues about what’s on hand to feed America’s midcontinent refineries and about oil speculation on the Nymex…
Some analysts contend that Cushing may give a distorted view of market dynamics. “The market seems to be pricing in a looming shortage,” says Tim Evans, an analyst at Citigroup Inc. “But the only place in the U.S. that seems short of crude oil is one very small, but influential location — Cushing, Oklahoma.”
As Felix Salmon has pointed out in another context, Wall Street elites read the business press differently than you and I do. That’s not to say these oil traders needed a WSJ story to turn them on to their idea, but it’s a good example of how we as journalists should train ourselves to read. And let’s offer a round of retroactive applause to the Journal for that 2007 piece, which looks even smarter now.
One critical thing missing from today’s Journal and Times pieces is how much this alleged plot ended up artificially boosting the price of oil. How much impact, if any, did it end up having on consumers?
The Financial Times, at least, reports this:
While the traders were only able to move the price by $1, compared with a $20 rise in the price of oil between January and April 2008, the large volumes involved allowed them to generate their profit.
Needless to say, that information should have been in the Times and the Journal.