In May the Commodity Futures Trading Commission filed charges against some U.K./Australia oil traders saying they schemed to drive up oil prices in early 2008.
The charges grabbed a lot of attention for several reasons:
- the alleged activity happened during the run-up to record-breaking oil prices in 2008
- the CFTC had said previously that it could find no signs of manipulation
- and the charges were announced as U.S. gasoline prices were threatening to break the $4 per gallon mark.
It gave many people a reason to shout “I told you so!” and prompted Democrats on the House Natural Resources Committee to post a video that uses scenes from the Eddie Murphy movie “Trading Places” to help explain the CFTC charges against the trader. (see it below)
It is also part of the reason Sen. Bernie Sanders (I-Vermont) filed a bill this week calling on the CFTC to immediately put limits on how many oil futures contracts traders could hold. (Never mind that they’ve been trying to write the rules to do just that to comply with Dodd-Frank for several months now).
But Craig Pirrong, a University of Houston finance professor who specializes in commodity markets, says the CFTC has a very tough case to prove.
Pirrong notes that the CFTC does not allege the companies tried to “corner” the market, but rather engaged in deceptive conduct:
“[The traders allegedly] bought cash WTI forward contracts it did not need, then sold those contracts in the last three trading days of the WTI ‘cash window.”’ The CFTC alleges that the buying deceived the market by suggesting buying interest that was not there, creating a false perception of market tightness. This perception of increased tightness caused backwardation to increase.”
But after some lengthy analysis, Pirrong concludes that the prices and trading patterns seen in early 2008 are not consistent with the CFTC allegations.
“Prices fell throughout, even after Arcadia allegedly fooled the market into believing that conditions were tight. Prices and backwardation did not rise when Arcadia was buying. Backwardation was rising when Arcadia was actually selling the spread. The spread collapse during the cash window that the CFTC apparently believes is its “Gotcha” piece of evidence was mirrored by collapses as large or larger in other types of oil.”
Pirrong says he’s all for going after rule breakers (and not a big fan of efforts to rein in the market with convoluted structures and restrictions, as some argue the Dodd-Frank rules are doing with energy markets). But he concludes “This will be a very difficult case for the agency to win.”
One might expect the evidence in the case, such as emails where the traders seem to be discussing illegal actitivity, to make this an open-shut case for a jury.
But earlier this year the 5th U.S. Circuit Court of Appeals held up a lower court decision that a group of BP propane traders didn’t break the law as alleged in the original complaint, despite discussions about “controlling the market at will.”
Just this week, the case against Dennis Abbott, the trader who was cooperating with the government, was dismissed. So even convincing a jury of wrongdoing may not be enough when it comes to claims of energy price manipulation.