Digg
One of the striking things about the CFTC case alleging oil-market manipulation is how little money the CFTC suggests was involved, which would seem to make such a scheme remarkably cheap to run.
According to the complaint, the defendants in early January 2008 bought up 4.6 million barrels of crude oil, representing the vast majority of physical barrels available at Cushing, Oklahoma, for February delivery. That was enough, according to the complaint, to create the impression of tight supplies, driving market prices higher.
At the time Arcadia et al were allegedly building this position, Cushing crude oil cost about $93 a barrel. So ostensibly it cost about $428 million to buy up enough physical crude to manipulate the market.
When the defendants allegedly took their second bite of the apple, in early March, according to the complaint, they amassed 6.3 million barrels of crude. At the time, Cushing crude cost an average of about $107 a barrel, so 6.3 million barrels would have cost about $674 million.
So, if I’m interpreting this correctly, the complaint alleges Arcadia et al spent about $1.1 billion to corner the market in physical crude at Cushing, and that was enough to rack up a $50 million illicit profit.
That seems like kind of a long walk for a 5% return, is my first thought, although if it’s possible to use leverage to amass such a stockpile, then it could become markedly easier and more profitable.
My second thought is that, if we assume for the sake of argument that even the concept alleged here is realistic, that relatively small operators could accomplish corner the WTI crude-oil market with just $1 billion, then how easy must it be for far larger players to manipulate the market for even greater gains?
Am I missing something here?
MySpace
Digg
del.icio.us
StumbleUpon
Error message
This could suggest more than one trading house doing the same thing during that period
Critical bottlenecks can exist in markets, like there appears to be at Cushing, where small changes in supply/demand can be magnified. Add in leverage plus the ability to quickly enter and exit the commodity positions results in quite a vulnerable scenario that could be exploited as described.
http://brianfaust413.blogspot.com/2011/05/dont-hate-player-hate-game.html
Mark, you are point on. It is easy for these big guys to manipulate with less money and as you said – with leverage, its even easier/cheaper to manipulate.
MarketBeat looks under the hood of Wall Street each day, finding market-moving news, analyzing trends and highlighting noteworthy commentary from the best blogs and research. MarketBeat is updated frequently throughout the day, helping investors stay on top of what's happening in the markets. The Wall Street Journal's Chief Markets Commentator Dave Kansas and MarketBeat lead writer Matt Phillips spearhead the MarketBeat team, with contributions from other Journal reporters and editors. Have a comment? Write to marketbeat@wsj.com or write Dave at dave.kansas@wsj.com or Matt at matt.phillips@wsj.com.
Read Full Article »