We discussed the other day that the Commodities Futures Modernization Act took regulatory oversite of the oil markets away from every exchange but the NYMEX.
On that basis, it is the NYMEX that is quoted on CNBC and pretty much everywhere else the price of oil is being discussed.
What you usually see quoted is the October Light Sweet Crude contract which peaked at $79.86 on 7/14, fell to $68.65 yesterday and made a spectacular recovery to $70.36 today. We rolled into October on the 25th where oil was held up to $72.50 and quickly fell off the table the next day.
What you don't see is the November contract, which peaked at $79.25 on 8/6 and dropped to $71.23 with no magic bounce. Or the December contract which peaked at $79.75 on 8/6 and finished the day at $72 with no bounce, or the January contract which peaked at $80.35 on 8/6 and finished the day at $73.02 with no bounce, or the February contract which peaked at $80.20 and finished the day at $73.61 with no bounce or the March contracts which finished at $74.08. (source)
So, it doesn't apparently doesn't pay to manipulate the contracts the public can't see! In fact, as you can see from this graph (sorry it's not a good one) , it didn't pay to pump up the October contract until the afternoon of the 25th, just as the contracts were rolling over.
Aren't you happy this huge show is being put on just for you? There is also an alarming lack of interest in the February and March contracts. Open interest in October is 220K, Nov-Jan about 100K, which is normal but Feb interest falls off its own cliff to 22K, even less than March's 29K interest. This is less than 2 day's worth of oil that is being ordered in Feb and March at $74 per barrel!
By the way, do you know how much you can buy oil for in Dec 2012? $67.38 for guaranteed delivery of as much oil as you want. Where is T. Boone Pickens? This is 5 years past his peak oil $200 prediction, he should have a billion contracts at this price shouldn't he? Come on T Boone, let's put some money where that mouth is!
How much does it cost to manipulate the market? The NYMEX is, as we learned from the above mentioned report, is the only regulated exchange and gets very little oil trading volume compared to the ICE and others. How little? Just 13,866 monthly contracts (1,000 barrels) were traded today at about $70 per barrel. This is only 1.5% of the US's MONTHLY oil consumption! Think about how much emphasis we give this small figure...
Let's say, for argument's sake, that it took 2,000 contracts (about 1/6) to control the market. That's $7Bn! Too much? You would think so but, as we learned from our investigation, due to the lack of ANY regulation on the other exchanges, you can take a put on the ICE for every call you take on the NYMEX and never take delivery! You would lose the spread, perhaps $100M so it doesn't seem worth it until you take the next step:
The people manipulating the NYMEX don't care about the price of oil at all... They care about the price of Exxon, Conoco, Sunoco, RIG, HAL and other sector stocks that have Trillions of dollars of market caps. A 1% move in the oil sector is a $20Bn profit or loss in sector market cap.
Exxon, for example trades about 20M shares a day for $67 each, that's $1.3Bn a day of Exxon stock alone. Barclays Global has 241M shares of Exxon worth $13Bn and 83M shares of COP worth $5Bn and 82M shares of CVX and 14M shares of Suncor... Let's say they have $100Bn tied up in oil...
Now not Barclays, because I'm sure they are super honest and do everything by the book, but let's say that some other investment house, hedge fund or whoever the new Enron is, has $100Bn tied up in oil stocks. Let's say those stocks drop suddenly 10%, just like the OIH did between May 11th and May 22nd. It's hard to unload 83M shares of COP because it only trades 8M shares on an average day. This is BIG TROUBLE!
Even the best investment managers (think Warren Buffet) have trouble explaining how they lost $10Bn in one week. Then from 5/22 to 6/12 the sector gives up another 7% - YIKES!
Well, you can take it like a man, start lightening up your positions and accept a $20-25Bn loss for the Quarter, as most honest hedge fund managers would do - or you could cheat!
It's easy, we just showed you how (and believe me, they can do it a lot better than I can).
There are 330 Energy dedicated hedge funds in addition to thousands of mutual funds, index funds, private money managers, arab sheikh, Chinese government officials (remember the zinc scandal) and other private investors who have the means, the motive and the opportunity to rig the system with Billions of dollars on the line and virtually no chance of being caught.
What do you think happens?!