CTFC investigates false reporting of oil inventories.

[SirNitram]

Link

(Reuters) - Commodity market regulators are probing whether energy market players are injecting false crude oil supply data into the marketplace, the Wall Street Journal said.

Regulators are concerned that companies may be reporting inventory levels that benefit their own trading positions but may not be accurate, the paper said, citing people familiar with the probe.

Unexpected drops in oil inventories reported each Wednesday by the U.S. Energy Information Administration can spark price spikes on the main oil futures benchmark on the New York Mercantile Exchange.

The report noted a company could theoretically underreport barrels in its tanks to suggest oil is scarcer than it really is, and then sell its physical oil at a premium when oil prices jump on misleading news.

The regulators -- the Commodity Futures Trading Commission (CFTC) -- may have been tipped off on unexpected big market moves by sources in the oil trading world, the Journal said.

The CFTC is taking depositions, or testimony, about some of those periods, lawyers told the paper.

No-one at the CTFC was immediately available for comment.

We'll see how much validity this holds.

[Sea Skimmer]

It wouldn’t surprise me one bit if this sort of thing goes on, but I cannot think it had any really significant impact on prices. While it would be trivial to underreport oil inventories, how much oil is entering the US market and how much is being consumed overall is something harder to distort, so the wiggle room available for manipulating data is limited.

[J]

While it would be trivial to underreport oil inventories, how much oil is entering the US market and how much is being consumed overall is something harder to distort, so the wiggle room available for manipulating data is limited.

Indeed. Every barrel of oil is counted several times from the time it's unloaded from an oil tanker, pipeline or pumped from the ground to when it leaves the refinery as finished products. The finished products are also counted every time they enter or leave a pipeline so we have a pretty good idea of where & how much of everything there is.

Errors can creep into the system over time, but that's why the DOE carries out audits and resets the inventory numbers near the end of each year.

[Elfdart]

Funny you bring that up. I heard this interviewwith Greg Palast and it looks like the oil companies (and their henchmen in Washington) have been cooking the books when it comes to the oil supplies. Back in May, Ed Wallace came to the same conclusion:

"There’s a few hedge fund managers out there who are masters at knowing how to exploit the peak [oil] theories and hot buttons of supply and demand and by making bold predictions of shocking price advancements to come, they only add more fuel to the bullish fire in a sort of self fulfilling prophecy." — National Gas Week, September 5, 2005 as reprinted in the US Senate Permanent Subcommittee on Investigations’ report, "The Role of Market Speculation in Rising Oil and Gas Prices," June 27, 2006

Fiddling While We Burn

There it is in plain sight for everyone to see, exactly what I’ve been reporting for the past few years: Many individuals who are investing in oil and natural gas futures are going out in the media and trying to convince the American public that either we are out of oil or there is a serious supply shortage of crude against worldwide demand. The question is: Does it surprise you to discover that the US Senate investigated the rigging of the oil market by speculators in the summer of 2006 – and concluded that there was no supply and demand problem with oil? Did you know that their conclusion was that speculators were responsible for a 70 percent overcharge in the price of oil in the months leading up to the summer of 2006?

This from page 1 of the Executive Summary of that Senate investigation, there is this one troubling line: "Today, U.S. oil inventories are at an eight-year high, and OECD (Organization for Economic Co-operation and Development) oil inventories are at a 20-year high."

That’s odd because, in 2006, just like today, the media reporting covered the serious international shortage of oil and justified oil’s high price. Even more troubling is that the House of Representatives held a hearing this past December, ominously titled "Energy Speculation and Price Manipulation." How did it pass under the radar that both the Senate and the House studied the issue of price manipulation in our energy markets and both concluded that it was unregulated, massive trading in one futures market that was really driving up the price of oil and natural gas? And given that conclusion, why has Congress done nothing about it?

Investors Make the News, Literally

A week ago Goldman Sachs issued a new investor note, suggesting that somewhere between six months to two years, the price of oil could go into a "super spike" and prices jump as high as $200 per barrel. It became the major story of the night. Ignored in the reporting frenzy was that many legitimate and well-respected oil analysts dismissed Goldman Sachs’ prediction as groundless.

Get ready for the next shock to your system. In the past month we have added 11.9 million barrels of oil into our stock reserves, giving us 32.3 million more barrels of oil than we had on hand January 1. On May 5, we found out that for the second time in as many years, Iran was storing its excess crude oil on tankers in the Persian Gulf, because it had run out of storage space in the desert and was awaiting buyers for its heavy crude. That same day Saudi Arabia cut the discount price for its Arabian Heavy crude to $7.45, hoping to entice more buyers for immediate delivery. We didn’t hear that news, either.

While researching my third article for BusinessWeek online about the world’s oil situation in 2008, I asked for the most current report from Oil Movements. Because the oil industry is not transparent, Oil Movements tracks every tanker at sea, from both OPEC and non-OPEC oil countries, along with their cargoes’ final destinations. Anne O’Shea responded immediately to my request with their report dated May 8, 2008. Just so you will know, oil shipments are up from a year ago in almost every class, including Middle East oil in transit and Non-OPEC in Transit. The only class of oil shipment that has declined is covered on page 3 of that report. That chart is labeled, "4-Week Changes in Westbound Oil at Sea."

That’s right, shipments of oil headed west have shown serious declines during the month of April, down 800,000 barrels per day in the week before the publication of the report. Now, let me give you the first line from under the Westbound Oil shipments chart: "In the west, a big share of any [oil] stock building done this year has happened offshore, out of sight."

Could this be true? Oil Movements, the unimpeachable source for finding the real world situation on oil transits, is saying that oil is being hidden offshore, not declared in inventories? Yes, that is exactly what they are saying.

That same week our refineries cut their production runs back to 85 percent, down from 89 percent a year ago, to trim more gasoline out of our stock reserves, to increase their profits per gallon.

National Short-Term Memory Loss

It’s amazing how quickly we forget our recent history. Congressional hearings in 2001, blasting certain Wall Street executives for using the media to sell the public on stocks in order to bid up the price – so their firm could divest of its shares without taking a beating. Meanwhile, other trusted advisors pushed stocks that were fundamentally worthless, because their affiliated banks had large loan agreements with those companies.

The year before Enron had been caught manipulating the California energy market, even forcing rolling blackouts across the northern part of their state apparently just for effect – to support their claim that there just wasn’t enough electricity to go around. Again, we now know that claim was untrue. It was Enron shutting down certain power generation plants, while placing bets on their unregulated energy futures market. The net cost to California consumers was almost $8 billion.

It didn’t end there. Amaranth Advisors, a hedge fund, literally was cornering the market on natural gas futures, to make it appear that there was a shortage of natural gas, when the Commodities Futures Trading Commission told Amaranth to liquidate its position on the NYMEX because its bidding had already moved natural gas prices far beyond the reasonable limits of supply and demand. Now, remember this name: ICE, short for Intercontinental Exchange – the "dark futures lookalike market."

Once the CFTC told it to back off its natural gas futures contracts, Amaranth simply shifted gears, got out of the NYMEX, placed its massive bets outside of government regulation in ICE and managed to drive natural gas futures to $8.50 per MBtu.

As the Senate investigation into the manipulation of the energy markets showed, "Amaranth – the day before they failed, natural gas was about $8.50; the day after it failed, it went to $4.46 MBtu." That’s right, one major hedge fund managed to double the price of natural gas simply by loading up on futures contracts; when the government told them their bets were unwarranted, they simply moved their monies to a futures exchange that was unregulated. Only when Amaranth failed did natural gas prices fall back to what was considered normal for supply and demand.

Sadly, like oil today, when this was happening we were being told that natural gas supplies were tight worldwide. That statement simply wasn’t true.

Dark Future

Likewise, British Petroleum was busted for manipulating the propane market in the winter of 2004 and fined $373 million. Of course, in Texas, under deregulation of our public utilities, our electric rates can be set using the futures market for natural gas, so the manipulation of the natural gas market spelled trouble for us. Consider this, by 2006, according to www.powertochoose.org, electricity rates for us had climbed to 15 cents a kilowatt-hour due to the high cost of natural gas. But, that was the exact same time period that Amaranth was proven to be manipulating the market and sending natural gas futures through the roof. Two months later the hedge fund collapsed and natural gas prices fell. Therefore, most Texans paid higher electric bills for Amaranth’s manipulation of the natural gas market.

Professor Michael Greenberger of the University of Maryland, a former board member of the Commodities Futures Trading Commission, testified in front of the House Committee on Energy and Commerce on December 14 of last year. Under discussion that day was the manipulation of the energy markets and prices, but Professor Greenberger added these comments: "Three, four months from now, you’re going to have a hearing on the subprime meltdown, and you’re going to find that the very same legislation [deregulating energy] deregulated something called collateralized debt obligations, CDOs." That legislation, friends, directly ties the mortgage meltdown to the high price of energy today.

It was called H.R. 5660, the Commodities Futures Modernization Act of 2000. At first this bill went nowhere in the House, not even up for debate. Then, a few months later, late one night a 242-page bill written by Wall Street lawyers, with the exact same name as the former House bill, was quietly added to an 11,000-page appropriations bill, and the Enron loophole was created. The power behind that bill was one Texas Senator, one Texas Congressman and their wives.

Next week: How the unregulated futures market pushes the price of oil, natural gas and gasoline far beyond those commodities’ market value, thanks to the creation of the Intercontinental Exchange. Worse, Congress knows this, but does nothing.

© 2008 Ed Wallace

[Illuminatus Primus]

The question is: Does it surprise you to discover that the US Senate investigated the rigging of the oil market by speculators in the summer of 2006 – and concluded that there was no supply and demand problem with oil?

Sorry, Elfy, but a global decline in the rate of growing production is undeniable, and Hubbart linearization techniques are not dependent on these variables. The sharp rise in demand is also undeniable. There are always assholes who will push people out of the way running out of a burning building, or lie to a competitor for a seat on the Titanic of where to go to reach the lifeboats.

[Singular Intellect]

Frankly, I'm far more concerned about the OPEC countries lying about their available supply.

[J]

A few notes:

• Oil Movements only covers tanker traffic, a lot of oil is moved by pipeline and they don't track that.
• In recent years, refiners & oil companies have tried to keep as much oil in their reserves as possible since they know the supply situation is tight. Note how in the last few years, and again this year, the US has run down from near record inventory highs to below average lows over the course of a summer. It's a very bad thing if a refinery runs out of oil so they stockpile as much oil as they can during seasonal product changeovers and try not to run out when production ramps up. This is also why refinery utilization is falling and dropping gasoline inventories uncomfortably low, it's better to run out of finished products than it is run out of oil and then have to do an emergency shutdown of the refinery.
• The supposed offshore storage. I very much doubt it exists or else it would be all over The Oil Drum already via pictures from Google Earth. They have people there counting drilling rigs in the Saudi desert to see how their oil projects are progressing among other things, they have a count on those Iranian tankers sitting in the Persian Gulf, I very much doubt they'd miss some kind of "secret" offshore storage facility in the US. To take the implied amount of oil off the market, these things would have to be the size of several football stadiums, and that's just a bit hard to hide. Plus the tankers would have to load & unload at these terminals and that's going to be quite visible.

[Elfdart]

The question is: Does it surprise you to discover that the US Senate investigated the rigging of the oil market by speculators in the summer of 2006 – and concluded that there was no supply and demand problem with oil?

Sorry, Elfy, but a global decline in the rate of growing production is undeniable, and Hubbart linearization techniques are not dependent on these variables. The sharp rise in demand is also undeniable. There are always assholes who will push people out of the way running out of a burning building, or lie to a competitor for a seat on the Titanic of where to go to reach the lifeboats.

I think the Wallace article was referring to the short term. Obviously, oil is a finite mineral, but has demand more than doubled since 2001? The price of oil has.

I remember the oil glut of 1986-87, when gas prices went down to 26 cents a gallon in my neck of the woods, and Von Reagan's chief oil lackey, James Baker scoffed at the idea of filling the strategic reserve while the price was so low. This was on the grounds that putting oil in the reserve (which IIRC was only about two-thirds full) accomplished nothing but driving up prices by taking it off the market. But last month, the Junta was still buying for the Reserve (which is over 90% full now) at the ridiculous prices, which I should think would be driving them even higher. How much of an effect does the Strategic Reserve (or other hoards) have on the price?

[Edi]

From all that I have seen and read, minuscule. If I understand correctly, it's a drop in the bucket compared to normal consumption and wouldn't last a week at those levels. It's meant purely to enable the government to operate emergency stuff if the shit really hit the fan.

[Admiral Valdemar]

The US SPR is around 727 million barrels, with a supposed expanded capacity to a billion which Bush instigated but never completed. At 20 million barrels a day US consumption, it wouldn't last long at all. That's horribly simplified, since the US still produces a lot of oil, however, even going by just replacing imports were something to happen to them, that doesn't leave long before rationing comes into effect. About 60 days worth.

[J]

I think the Wallace article was referring to the short term. Obviously, oil is a finite mineral, but has demand more than doubled since 2001? The price of oil has.

The key to oil prices is spare capacity, how much excess supply there is with respect to demand. In 2001 that was around 10 million barrels a day, the producers could wing open the taps on the wells and flood the market with 10 million barrels every single day and keep that up for as long as they wish, thus hurricanes, speculators, and so forth would have no real effect on the price. 3 million barrels per day just got taken out by a hurricane in the Gulf of Mexico? No problem, OPEC can fill that need until the platforms are running again.

This is no longer true, spare capacity these days is estimated to be in the 1-2 million barrel per day range, and this is only a short term surge capacity which can be maintained for around 90 days. One hurricane in the wrong place and poof, all the spare capacity is gone and demand outstrips supply driving the price through the roof as everyone puts their bids in to avoid running out of oil.

That's the problem we have now, supplies are very tights so all kinds of fairly minor events can swing the price all over the map. It's basic economics, supply tightness leads to high volatility and instability in prices. Prices will, and have taken huge swings in both directions.

I remember the oil glut of 1986-87, when gas prices went down to 26 cents a gallon in my neck of the woods, and Von Reagan's chief oil lackey, James Baker scoffed at the idea of filling the strategic reserve while the price was so low. This was on the grounds that putting oil in the reserve (which IIRC was only about two-thirds full) accomplished nothing but driving up prices by taking it off the market.

He was a bit of an idiot to say the least and missed a golden opportunity.

But last month, the Junta was still buying for the Reserve (which is over 90% full now) at the ridiculous prices, which I should think would be driving them even higher. How much of an effect does the Strategic Reserve (or other hoards) have on the price?

The SPR has minimal effect on oil prices, at most it takes around 70,000 barrels a day off the market. Considering that US consumption alone is around 20 million a day and world consumption is 4 times that of the US, it's rather akin to taking a couple buckets of water out of an Olympic size swimming pool.

[Sea Skimmer]

I’m a bit suspect of what this Ed Wallace guy is saying, because a surplus of heavy crude means nothing, oil prices are all about light crude, and decent reports on oil prices specify what type of light crude beyond that, because that’s the crude that’s useful for making more then asphalt or bunker fuel. Heavy crude simply cannot be used in most refineries, and indeed in many climates the oil with barely even flow in a pipe, its almost gel like in wintertime.

The US SPR is around 727 million barrels, with a supposed expanded capacity to a billion which Bush instigated but never completed. At 20 million barrels a day US consumption, it wouldn't last long at all.

Yeah it would, because the SPR has really absurdly huge underground storage tanks… and not very absurdly huge pumps to move the oil. Maximum withdraw rate is 4.4 million barrels per day, meaning that the oil will last nearly six months. That will be six months of near economic shutdown but at least our jet fighters will still have gas in the event Mexico tries to reclaim Texas or something. Also keep in mind that US oil companies at any given time may have around 500 million more barrels in storage tanks, and an actual complete shutdown of all oil production and is implausible. Even if we got hit with thousands of nukes you’d still be able to find working derricks which could be powered off diesels running off the raw crude.

[Admiral Valdemar]

Yeah it would, because the SPR has really absurdly huge underground storage tanks… and not very absurdly huge pumps to move the oil. Maximum withdraw rate is 4.4 million barrels per day, meaning that the oil will last nearly six months. That will be six months of near economic shutdown but at least our jet fighters will still have gas in the event Mexico tries to reclaim Texas or something. Also keep in mind that US oil companies at any given time may have around 500 million more barrels in storage tanks, and an actual complete shutdown of all oil production and is implausible. Even if we got hit with thousands of nukes you’d still be able to find working derricks which could be powered off diesels running off the raw crude.

In the event of total nuclear war, oil stores of such size are somewhat redundant. Having all major infrastructure wiped out means a lot less black stuff is needed. The SPR's primary purpose is to be used to supplement normal operations in the event of imports being cut off for whatever reason. The EIA puts maximum standard operations expectancy at 60 days worth of supply, which is not a lot to keep industry going at any real pace. If the US can't get anything more from that point, your economy and a lot of people are fucked one way or another. Not that it matters in a nuclear war, of course. They're fucked more then.