Speculator revealed?


This blog has written repeatedly about a move by commodity regulators in July that essentially revealed speculators played a much larger role in oil futures markets than previously realized. The big question that remained: who was the company that the Commodity Futures Trading Commission determined was actually a speculator, not a commercial participant?
The top candidate was the now-bankrupt SemGroup. The oil logistics firm crashed at about the same time the CFTC made the change.
A reclassification would have meant the trading party would have had to come up more collateral in a hurry to meet the somewhat tougher trading requirements as a speculator. One estimate says a company might need to come up with as much as $750 million to cover such a change. That sounds like enough money to lead one to consider Chapter 11.


But now the Wall $treet Journal and the Washington Post say they know who: Vitol Group.
From the WSJ story:

“Though less well-known in the U.S., the company is one of the biggest players in the oil market, linking buyers and sellers of physical crude oil and refined products. It has interests in storage terminals and oil exploration around the world and sold a large refinery in Canada in 2006.”
A Vitol spokeswoman wouldn’t confirm that its trading was reclassified by regulators as noncommercial speculation, saying only that it was contacted by the CFTC this summer as part of a review by the agency into the trading activities of commercial traders known as “swaps dealers.”
“Swaps dealers sell energy derivatives to clients and are classified by the agency as commercial traders when they make trades to offset risks of those client transactions. Trades classified as commercial aren’t supposed to be purely speculative in nature. Commercial traders get more leeway on exchanges to make large trades, although distinguishing between the two can be difficult.”
In May, Vitol said in a statement that it “is not in the business of taking large positions speculating on the rise or fall of market prices.” Vitol said Tuesday that it hadn’t been contacted by the CFTC or Nymex regarding reclassification and that its trading status on Nymex “remains the same” and that “as far as Vitol is aware the company’s trading status with the CFTC is unchanged.”

The reason Vitol said in May it “is not in the business of taking large positions speculating” was in response to a Times of London story that claimed a Houston-based oil trader made £100 on oil speculation.

“Andrew Serotta made the killing for his employer Vitol, a Swiss trading company, when he bought 40,000 oil futures contracts nine months ago.”
“The American, who divides his working life between Geneva and Houston, Texas, is one of many savvy traders profiting from – and some say fuelling – the soaring price of oil, which last week touched $135 a barrel and is expected to force the price of petrol at the pumps in Britain to 116p a litre.”

More of Vitol’s reply to the article:

“The trading activity and profits attributed to Mr. Serotta as stated in your article are based on faulty assumptions and are entirely inaccurate.”
“Further, despite your claims, Vitol is not interested in supporting higher oil prices. Vitol would prefer a much lower price for reasons of working capital requirements and overall credit control. “

Whether it’s true or not, it may strike some as odd that a firm that doesn’t own pipes and production can be classified as “commercial” by CFTC. It turns out that definition has shifted over time, beginning with an exemption given to a Goldman Sachs entity back in 1991.
One point the Washington Post makes: the percentage of transactions linked to speculators could grow as the CFTC continues its probe.