More on Marathon

Houston’s Marathon Oil revealed in an SEC filing this week it may face legal action by regulators for allegedly trying to manipulate oil prices in 2003. See our story on this today.

marathon_refinery Marathon’s Garyville, La. refinery.

The pending legal action by the Commodities Futures Trading Commission, as described by Marathon, would be against the company’s refining business for essentially selling oil on the physical markets below market prices.
If you’re not involved in this business daily this filing may raise a few quesitons, including:
1. Why would a refining business be selling crude oil? Wouldn’t they just buy it to feed into a refinery and sell finished products like gasoline?
2. Why would the CFTC have jurisdiction over actions on a physical market? Aren’t they just supposed to look at futures?
The possible answers, as given by people in the industry the Chronicle spoke to:
1. Refineries with multiple locations (like Marathon) may from time-to-time sell crude they bought previously for one of the refineries that they later realize they don’t need. Maybe maintenance issues mean the demand at a particular unit will be less, for example.
2. The CFTC would get involved in a physical transaction if it could have an impact on the futures markets. The settling price of physical trades at the end of the month is often used to create price indexes, which are published by companies like Platt’s and used by others to set the terms of other contracts.
That’s why the CFTC might get involved in an issue like allegations against Dallas’ Energy Transfer Partners, which some natural gas producers have claimed tried to manipulate natural gas prices.
It’s worth noting Marathon says it is not being accused of reporting false prices to index publishers, a practice that was widespread in the natural gas business and has led to civil and criminal charges against more than a dozen former gas traders here and around the country. The CFTC has also collected hundreds of millions in fines from this activiity.
In today’s story Craig Pirrong at the University of Houston’s Global Energy Management Institute made reference to a certain cheese company and allegations it sold cheese on the former-Green Bay, Wisc. cheese auction in order to manipulate prices. Here’s a report about that market, which is actually a good primer on the weaknesses of thinly-traded markets.