Oil Prices and 'Wash Trades'

The Commodity Futures Trading Commission implements the Commodity Exchange Act. Within the Act the Commission can prohibit "Excessive speculation" Sec.6a(a). Their rules do not apply to the traditional futures-market participants, commodity buyers and producers, that trade oil in order to manage the risks of rising or falling prices in their own businesses.

But for a "Eligible contract participant Sec.1a(12)", whose definition includes any financial institution, there are prohibitions. Sec.6(a)(1)(2) states that it is unlawful to enter into or confirm a transaction described as a "wash sale" or "accommodation trade" or "fictitious sale" so as to, "cause any price to be reported, registered, or recorded that is not a true and bona fide price." This Act was changed by the Commodity Futures Modernization Act of 2000. One of the sources for this Act was Phil Gramm. He is now the economic advisor to McCain.

The spot price of oil is driven approximately 60% by the U.S. dollar and that leaves 40% of the oil price to be accounted for. Oil supply constraints seems to be the most popular answer. While it is expensive and difficult to produce oil, it is produced nevertheless. No buyer of oil has ever been turned away. There are the occasional oil interruption scares [spooking-the-price].

The spot price of WTI oil in June, 2007 was $65.34 per barrel; today it is at $136 per barrel, for a 109% increase. Neither world demand [five year average growth is 2%] , E&P inflation, or the weakening U.S.dollar can fully account for the entire 109% increase. Perhaps wash sales or accommodation trades or fictitious trades can fill in any price gaps.

Notes: oil inventory includes: above & below ground storage; pipeline infill; ocean tankers; on-site user storage; plus proved reserves, as defined by the SEC under rule 4-10. Point = no shortage. No company is reporting production difficulties due to not being able to buy oil. It is a price problem eg.airlines or DuPont. Availability...no.

U.S. energy use in quadrillion BTUs: 2004 = 73.58; 2005 = 73.111; 2006 = 72.32;2007 = 73.77; 2008 est.= 74.64 [Annual Energy Outlook 2008, EIA]. No real growth here. Sixty-five percent of energy is used in commercial, industrial, and business transport. Any recession, whether U.S. and/or world, will impact this 65%.

U.S. or world recession will drop oil price. U.S. recessions date and WTI oil price: October 1990 at $36.17 to January 1992 at $18.75 for a 48% decline. November 2000 at $34.28 to November 2001 at $19.94 for a 42% decline.

Disclosure: None

Comments

[Edward Janeck:]

Oil has a different supply/demand balance now with the rise of Chindia. Soros thinks oil is in a short-term bubble, Matt Simmons thinks the US will have oil shortages. This market is like Nasdaq in 1998. I will tell you why @theinvestingspeculator...

2008 Jun 13 09:21 AM

[PokerDonkey:]

I love election year articles. Oil is up -> CFMA2k -> Gramm -> McCain. McCain = Evil Thanks for the info Willy. I guess I should vote for socialism in November?

2008 Jun 13 09:29 AM

[Alex Filonov:]

So let me get this straight. If "Sovereign investment fund" owned by Saudi Arabia government (and it is completely hypothetical situation, of course) buys a lot of oil futures which nationalized oil company of Saudi Arabia sells, is it a wash sale? Looks like it is.

2008 Jun 13 10:26 AM

[bill stenner:]

tell me something i didnt know

2008 Jun 14 04:22 AM