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Oil Traders Subpoenaed After Price Surge

POSTED: 12:45 PM ET, 09/24/2008 by Derek Kravitz

An unusual jump in crude oil prices has prompted federal regulators to subpoena the records of several Wall Street traders, calling into question the sometimes risky practices of so-called short-sellers.

The Commodity Futures Trading Commission announced the probe yesterday after late-hour trading on Monday resulted in the future crude-oil contract for October spiking as much as $25 a barrel, which The New York Times noted was its highest one-day surge ever.

The contract eventually settled at $120.92 for the day, up 16 percent, amid light trading. In comparison, the November oil-crude contract, which was more heavily traded, only rose to $109.37, or up 6.4 percent.

"The jump immediately caused analysts and traders to suspect that one or more traders holding short positions -- bets that oil prices would fall -- were scrambling to cover their bets in a rising market," The Times reported.

The Wall Street Journal reported that the spike "confounded experts and bore the markings of a run for the exits by a major player."

But other analysts told Bloomberg News that the jump likely had less to do with speculators and market manipulation and more to do with poor planning by short-sellers, traders who bet on the price of commodities to fall.

"It was a squeeze," Stephen Schork, a Virginia-based energy trading writer, told ReportonBusiness.com. "I'd be surprised if this was manipulation. It had more to do with either poor risk management or just plain stupidity."

Phil Flynn, Alaron Trading's energy expert, agreed, telling U.S. News & World Report's Kirk Shinkle the surge was a "classic squeeze play" possibly caused by only one or two traders who were caught off guard by the rising prices.

"My concern is this gives more impetus to the (theory that) speculators are driving the oil price among people who don't understand how markets work," Flynn said. "This is how markets work. People get caught in a position on the last trading day and it drove up the price."

This is not the first time that market manipulation has been theorized as driving oil-crude prices.

In July, regulators filed charges against Optiver Holding, a Dutch firm, and its U.S. subsidiary, accused three employees of completing illegal trades called "banging the close."

The phrase, The Post's David Cho explains, refers to the buying or selling of large volumes of commodity contracts, like crude oil, in the waning moments of a trading day.

By Derek Kravitz |  September 24, 2008; 12:45 PM ET
Previous: Wall Street Scrutinized for Fraud, Fat Paychecks | Next: Army Probes Possible Toxic Exposure in Iraq

Comments

Please email us to report offensive comments.



Whether market manipulation or a short squeeze, the spike reflected conditions in a futures market, not supply of and demand for oil.

Further, it seems to me that as more and more people and institutions seek to use oil futures as an investment or hedge, rising demand for the investment product pushes up prices of the underlying commodity even when there is no rising demand for the commodity.

I'm not an economist, I just play one in comment boxes, so take it with a grain of salt, but those are my concerns.

Posted by: Miss Hogynist | September 24, 2008 2:27 PM

Good for the Commodities Futures Trading Commission for instituting this immediate investigation.
The idea that a group of investors would take advantage of our stock market during these precarious days needs to be investigated immediately.
We are currently vulnerable and our watchdogs need to be vigilent, in order to protect us.

Posted by: Judy-in-TX | September 24, 2008 3:33 PM

By: Paul Revere

volley2.ind 4: ?>*:\ ...//2008:09:23:08:18:75*W
#89 of 90: William Hale (hinging0) Wed 24 Sep 2008 (01:12 PM)

Rep. Wally Herger (R-Chico) said, "I don't know anyone who's
sold on
this rescue plan."

===========NH:
A bunch of WALL-E's trying to sell their worthless junk to EVE?
===========NH//

volley2.ind 4: ?>*:\ ...//2008:09:23:08:18:75*W
#90 of 90: William Hale (hinging0) Wed 24 Sep 2008 (01:17 PM)

By Tuesday night, it was no longer certain that a version of the
Paulson-Bernanke plan could win passage, even if it included
such
sweeteners as more help for homeowners and caps on compensation
for
executives of companies that take part in the bailout.
==========NH:
I wanted to live under an Article I that required Article II to
direct
financial traffic as well as vehicular traffic was controlled,
but the
defendants wouldn't let me.
I think I have the right to live under an Article I that
legislates
rules of the road to Article II so that financial traffic is
directed
as well as vehicular traffic is because to "ensure domestic
tranquility" and all of the preamble pre-requisites, [sound]...
I want the court to order the defendants to vote the following
financial traffic regulations into law and enforce them with the
same
diligence vehicular traffic is directed and controlled. See
exhibit A
for Finical traffic regulations

xref; License, insurance, registration, speed limits, passing
lanes,
moving with the flow of traffic, observing signage, rights of
way
[exterior sound]...

Stopping distances...

as we
2 attachments — Scanning for viruses...
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569K View
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September 24, 2008 at 5:08 p.m. | Mark as Offensive

Posted by: W. Hale, aka, . M.A.O. | September 24, 2008 5:20 PM

OK. The article and the experts just said it; the price rise was caused by traders. Take note all you idiots who keep telling us that the price rises are caused by supply and demand: this is NOT supply and demand. Got it?

Posted by: William G. Stockglausner | September 24, 2008 6:39 PM

I agree with most of these comments. Call it what you will with all of the financial jargon that you want. I believe that this is NOT how the market was supposed to work. I was to work with a supply and demand model. Keep it simple and just allow the manufacturers to get a long term fixed price for a commodity and get most of the speculators (or whatever you want to call them )off of the trading floor. In my opinon, they have no business being there and the fact that the price of this commodity shot up in one day leads credence that speculation or whatever you want to call it is driving most markets and not supply and demand.

Posted by: MB | September 24, 2008 9:44 PM

This is misguided as ever. The job of the markets is price discovery, and the dollar as currency is a commodity as anything else. Hence, the dollar's relationship to Oil is as much to question as anything else (oil to natural gas to coal), and price discovery is essential in order to assure those supplying the commodity are aware of the real situation in their own business ventures.

What's being exposed in the global markets recently is the reality that many major players had completely mispriced assets, and across the board. Houses, for example, were far to high and unsustainable (for a host of avoidable reasons starting with Fed policy, albeit), and consequently the securities created with those mortgages were terribly misvalued. It is the market's job to discover what a more realistic price is for those assets. Throwing more good money after bad to support unsustainable values is a waste of an economy's seed corn.

The same holds true for the dollar's relationship to a host of other items, oil included. Too many dollars are in existence; dollar holders are vacating overpriced assets like houses and moving to other assets to restore a better price relationship. That's a large part of what you're seeing in oil.

Moreover, to attempt to kill this process by curtailing speculation is to end price discovery. Folks, this "speculation problem" is 1) not a problem, and 2) a symptom of the real problem: bubble and economic distortions caused by the Federal Reserve and Congress intervening in the free markets.

(No, we have not had a free market in the U.S., and to blame the free market for what's happening at the moment is ignorance of epic proportions.)

Posted by: J.C. Ernharth | September 25, 2008 9:29 AM

1. This is not about the stock market.

2. This is not about bad short sellers. In a futures market, buyers and sellers are alike in their market participation. The author's assertion that this is "calling into question the sometimes risky practices of short sellers" displays broad subject ignorance.

3. When prices rise fast and far, it is because there is more buying interest than selling interest. If prices are falling, then it is because more people are selling than buying. Why did prices fall recently? Because more people were selling. But when those sellers (who aren't bad when they're driving down your oil prices, right?) need to get out because they are worried about a price rise, they have to buy to offset. If large (and clumsy) sellers ended up suddenly becoming large buyers, up goes the price. But if you think that a seller is happy when they are buying large amounts back in a panic, guess again. The people making the money are those helping the panicked trader unwind, not the panicked trader.

4. Those still saying speculators are a major cause of market volatility apparently missed all the articles in the last month or so showing example after example of how limiting speculation has either harmed or not had any impact on a market's volatility. It might be worthwhile to stop being a parrot, squawking out the same thing as other panicked, clueless people, and start being a THINKER, able to analyze and understand.

5. The notion that all speculators are trading in one direction, and all commercial interests are trading the other way, is ridiculous. Speculators both buy and sell in a market. Commercial interests by definition both buy and sell in that same market. So which speculators will you regulate? The buying ones or the selling ones? Or just the ones that aren't trading in the "right" direction?

/rolls eyes and steps away from the keyboard

Posted by: Not A Parrot | September 25, 2008 11:57 AM

1. This is not about the stock market.

2. This is not about bad short sellers. In a futures market, buyers and sellers are alike in their market participation. The author's assertion that this is "calling into question the sometimes risky practices of short sellers" displays broad subject ignorance.

3. When prices rise fast and far, it is because there is more buying interest than selling interest. If prices are falling, then it is because more people are selling than buying. Why did prices fall recently? Because more people were selling. But when those sellers (who aren't bad when they're driving down your oil prices, right?) need to get out because they are worried about a price rise, they have to buy to offset. If large (and clumsy) sellers ended up suddenly becoming large buyers, up goes the price. But if you think that a seller is happy when they are buying large amounts back in a panic, guess again. The people making the money are those helping the panicked trader unwind, not the panicked trader.

4. Those still saying speculators are a major cause of market volatility apparently missed all the articles in the last month or so showing example after example of how limiting speculation has either harmed or not had any impact on a market's volatility. It might be worthwhile to stop being a parrot, squawking out the same thing as other panicked, clueless people, and start being a THINKER, able to analyze and understand.

5. The notion that all speculators are trading in one direction, and all commercial interests are trading the other way, is ridiculous. Speculators both buy and sell in a market. Commercial interests by definition both buy and sell in that same market. So which speculators will you regulate? The buying ones or the selling ones? Or just the ones that aren't trading in the "right" direction?

/rolls eyes and steps away from the keyboard

Posted by: Not A Parrot | September 25, 2008 11:57 AM

Why couldn't we just take commodities off of wallstreet? It seems to me like if that were to happen, the price of oil would be less likly to fluctuate so much.

Posted by: Confused | September 25, 2008 1:08 PM

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