The run up in the oil price last summer to $147 per barrel seemed rather relentless at the time. But when it did peak momentum turned rather suddenly. Interestingly, the peak also coincided with the blow-up of energy firm Semgroup.
Some analysts, like Stephen Schork of the Schork report, made the ‘uncanny’ connection at the time. But on the whole the market viewed Sem’s demise as only contributing to the rally in prices – not actually causing the epic final blow-out.
A hard-hitting analysis of the situation by Forbes, however, now dares to suggest a much closer connection between Semgroup, the oil price rally and certain major investment banks — specifically Goldman Sachs, who were the biggest proponents of the theory that oil could actually keep charging as high as $200 per barrel. As Forbes writes:
But now some of the people involved in cleaning up the financial mess are suggesting that Semgroup’s collapse was more than just bad judgment and worse timing. There is evidence of a malevolent hand at work: oil price manipulation by traders orchestrating a short squeeze to push up the price of West Texas Intermediate crude to the point that it would generate fatal losses in Semgroup’s accounts.
“What transpired at Semgroup was no less than a $500 billion fraud on the people of the world,” says John Catsimatidis, the billionaire grocer turned oil refiner who is attempting to reorganize Semgroup in bankruptcy court. The $500 billion is how much the world would have overpaid for crude had a successful scam pushed up oil prices by $50 a barrel for 100 days.
As Forbes itself stresses, the evidence for the above is indeed circumstantial. However, the article goes on to highlight the coincidental fact that Citi, Merrill Lynch and specifically Goldman Sachs could have had knowledge of Semgroup’s trading positions from vetting a $1.5bn private placement deal in the months beforehand. As Forbes explains:
What’s known for sure is that Goldman Sachs, through J. Aron & Co., its commodities trading arm, was in prime position to use such data–and profited handsomely from Semgroup’s fall. J. Aron was Semgroup’s biggest counterparty, trading both physical oil flowing through pipelines and paper oil, in the form of options and futures.
When crude oil peaked in July, Semgroup ran out of cash to meet margin requirements on options contracts it had with Aron, contracts on which it had paper losses of $350 million. Desperate to survive, Semgroup asked Aron to pony up $430 million it owed on physical oil. Aron said no, declared Semgroup in default on its contracts and demanded immediate payment of losses.
What’s more:
Shortly before it filed for bankruptcy, Semgroup sold its trading book to Barclays Capital. Barclays’ bold bet was that the price of crude would fall, erasing the losses. It is believed that 30 days later Barclays was sitting on a $1 billion gain as oil indeed fell, to $114 a barrel. Barclays wouldn’t comment other than to confirm it still owns the book. That prices plunged after Semgroup failed is more evidence of manipulation, says Catsimatidis: “With the portfolio in Barclays’ hands they could not squeeze the shorts anymore. The jig was up, and oil collapsed.”
Of course, interdepartmental leaking of information for profit is strictly forbidden – and Goldman, naturally, denies any breaching of its Chinese walls .
What we can be sure of, however, is the energy market’s unique propensity to generate conspiracy theories.
Much of this can be put down to the dependence of on-exchange futures pricing on over-the-counter physical trading, which by its very nature is suspiciously opaque. That, and the small number of major players…
One day all this will be tightly regulated, no doubt. But that day is unlikely to be soon.
Related link:
Oil speculator debate resurfaces – FT Alphaville