Wow. Turns out that in 2008 (into the mega rally time period) someone may have been “squeezing” oil after all.
As the FT reports:
The US commodities regulator has charged a trading house and two individuals with manipulating oil prices in 2008 by amassing dominant positions in the physical market that created the impression of a shortage. The charge is only the second oil manipulation case the US Commodity Futures Trading Commission has filed since launching a “nationwide crude oil investigation” three years ago as the cost of West Texas Intermediate, the US benchmark, surged towards a record high of $147 a barrel.
And the protagonists were:
The regulator alleged that Parnon Energy, a US oil trader, together with its Swiss and UK affiliates Arcadia Energy (Suisse) and Arcadia Petroleum, made more than $50m from the scheme in January and March 2008.
In case you’re not familiar with those names, we can assure you that the likes of Arcadia are top players in the industry. Not Glencore size, but certainly getting there and rightly classified in the same category of secretive Swiss-based commodity trading houses.
Arcadia was formed in 1988 as a division of Japan’s Mitsui, but was later sold to Norwegian shipping magnate John Fredriksen’s Cyprus-based Farahead Holdings in 2005, which owns energy-based shipping companies such as Golar and Frontline as well as an offshore drilling fleet.
The company has an estimated market capitalisation of about $11bn, while Arcadia Petroleum alone has access to over $4bn in lines of credit, according to this ASX announcement.
Crucially, Farahead provides integrated logistical support to Arcadia’s oil trading businesses.
The trading scheme itself, according to the CFTC, revolved around accumulating inventory at the Cushing delivery point so as to give an impression of tight supply. (For background on why Cushing matters see here.)
As the CFTC explained in its charge:
The traders’ efforts supposedly led to ‘only’ a $1 move in the flat-price of oil. Due to the size of their positions, however, it still translated into solid profits. The two traders involved were also able to profit from a managed liquidation of their position, something they referred to in emails as the “inevitable puking” of oil into the market.
The full complaint from the CFTC is now up in the Long Room for anyone interested in the details.
The interesting thing, of course, will be seeing how far the CFTC’s remit can go. Parnon Energy is a Texas-based company, but Arcadia operates out of London and Switzerland (via an affiliate).
The charge also raises critical questions about the current oil market structure, and specifically WTI’s over-dependence on the Cushing delivery point. It also clearly flags up important questions about the WTI contract’s viability.
Related links:
It’s all about Cushing - FT Alphaville
‘WTI about as useful as a chocolate oven-glove’ – FT Alphaville
Et in Arcadia ego – Wikipedia