Oil speculators, orange juice futures and tough court cases


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.

Tom Fowler

7 Responses

  1. Dollar says:

    Tom, the problem with omitting his conclusion, is that most people won’t visit the link, much less make it that far through Pirrong’s post.

    They’ve found their villain and they gonna pound him, in 25 words or less.

    And the only ” inference ” I’ve drawn, is that this a political dog and pony show, nothing more and nothing less.

  2. Commrade_Leftist says:

    Sell, Mortimer, SELL!!!!

  3. Tom Fowler says:

    Because I think I included a hell of a lot of Pirrong’s thoughts on the case already. Pirrong’s entire post is a counterpoint to the movie clip, which is *exactly* why I used it. And obviously the link to his post made it possible for people to read the entire thing. Thanks for giving me yet another example of people drawing huge inferences based on the omission of one piece of information.

  4. Dollar says:

    I also have a very hard time believing, that a couple of traders could move the market.

    I could believe that a group of hedge funds might get this done, but not some fringe traders.

    But hey, we must have the evil villain and the good guy in the white hat, because that’s how Hollywood writes the script ……. never mind that its pure fantasy.

    I do think speculators influence the price, when a majority of them are taking long positions, then yes, the price moves up. But if a majority were taking short positions, the price would move down.

    The question remains, why would a majority take long positions ??? Solve that, and you can then attack the problem of high oil prices.

    If OPEC or the Sauds, actually can follow through and increase production, then that can scare a lot of speculators out of their long positions ………. so is that speculation that drove the price, or was it supply/demand ???

    The tail can not wag the dog.

  5. Dollar says:

    And why did you omit Pirrong’s final conclusion ……..

    ” ………There’s another lesson here that has been lost in all of the hue and cry over the filing of the complaint. CFTC has been examining the oil market with a fine tooth comb going back to 2005 if memory serves. If this is the best case they can find after all that, the oil market must be pretty damn clean. …… ”

    Ohhh but , but using a movie from Hollywood as an analogy, is far easier than trying to understand what Pirrong is saying ???

  6. KB says:

    Excellent points Dollar. The Democrats are a comedy. The bad thing is that this doesn’t get front page…what gets front page across the world is the “big bad oil boys” on trial accused of “driving up gas prices” even though they have nothing to do with it. Then prices drop after the market corrects some, and people go away and the fury is over till the next time.

  7. Dollar says:

    Typical Democrat response, they will find someone to blame, just to deflect blame they are due for their misguided energy policies.

    This is a witchhunt.

    And its only fitting they use a Hollywood production to make their point, because that is where their mindset lives, in fantasy land.

    Its easy to blame speculators, because most of the voting public does not understand the futures market, not even a little.

    The convenient villain for everyone.