The After Hours Oil Scam

A huge effort, hopefully a last hurrah, was made to get oil up to MS’s $150 target for the July 4th weekend but, ultimately, they failed and a quick look at the chart for USO will show you why.  There was only 1 day in the last 5 in which regular NYMEX trading ended positive.  All of the other gains in crude were made in very thin after hours trading.

We can’t print intra-day NYMEX volume numbers as they are "proprietary" and no one knows what goes on on the ICE or the Dubai Exchange but if you have in intraday chart of USO that shows after-hours action, you’ll see what we see at the NYMEX (USO is an ETF that mirrors NYMEX trading).  In a typical day the NYMEX trades 240M barrels in the form of 240,000 1,000 barrel contracts at $8,750 per contract of margin to control $145,000 worth of oil (1/16th).  The margin requirements were raised from 1/30th to 1/15th in an attempt to forestall some of the speculation, the contract margin is set for the month so it reflects 1/15th of the month’s open, not the current price.

For the second week in a row, the vast majority of the gains made on the NYMEX were made in "electronic trading sessions" as the NYMEX is open 23 hours a day and floor trading shuts down at 2:35 each day, there is plenty of time for all sorts of shenanigans in the off hours.   

Again, I am going to use the USO to discuss this as most people can view that chart, I am hoping later this week that one of our Congressional representatives will be producing the NYMEX numbers and entering them into the official record.  What we have here is a shocking example of how this scam is being perpetrated on the American people and, since we are NOT talking about a lot of trades, it should be relatively easy to round up the people placing these orders and start asking them some pertinent quesitons.

Looking at the USO on 6/25 we see that they opened at $110.27 (corresponding to crude at $138) on Wednesday the 25th and, after the 10:30 inventory report showed a surprising net 3.7M barrel build in inventories, very quickly dropped down to $107.25 in very heavy trading.  Volume was 13,947,500 in USO that day, and it closed at $108.81 after what we at PSW affectionately call "the closing pump" as it happens pretty much like clockwork in the last hour of NYMEX trading (also very suspicious but not as easy to prove).

Once trading halted on 6/25, a grand total of 965,800 shares were traded after hours, causing USO to open at 111.38, a stunning $2.57 jump in pre-market trading. 

Thursday the 26th traded flat on heavy volume (15,274,200 shares) and was still trading at $111.69 at 2pm, one half hour before the close of NYMEX floor trading.  Suddenly, the closing pump was on and a surge of buying pushed USO (and crude) all the way up to close at $113.12 on a 2.6M shares spike, the entire day’s gain made on 1/6th of the volume pouring in during the last half hour.

After NYMEX trading was halted, the price drifted along to $113.03 but the excitement once again came after the lights were out as electronic traders jammed the price all the way up to $115.10 at 7:30 but that was completely unsustainable and USO opened it’s regular trading on Friday the 27th at $113.87, still up .75 on just 893,000 shares (6%). 

Friday, the 27th, was particularly fun to watch as oil traded up and down all day but the price was back to $115.68 before a large seller stepped in to EXIT his position, right into the 2pm pump.  Fireworks ensued and 2.3M shares were traded in that half hour (15% of the day’s volume) but as soon as the seller stopped at 2:30 at $113.45, a fresh round of buyers HAD TO have USO/oil in the next 5 minutes at $114.  The minute the NYMEX closed at 2:35, the buyers suddenly "lost interest" and USO drifted into the weekend at $113.75.

It took just 152,000 shares to get USO back to $116 (up 2%) by 6:45 am on Monday the 30th, and they managed to hold $115.16 into the open on 253,000 additional shares.  Once real trading began, oil and the USO plunged to $113.24 and again, our wise dumper took advantage of the pump crew and sold into the close, closing the day at $113.66 despite mid-day efforts to retake $115. 

11,950,000 shares were traded to arrive at $113.66 but - once the markets closed, there was a bull run on crude, taking the USO from $113.66 all the way to $115.69 on just 409,000 shares (3%) ahead of the market’s open on Tuesday the 1st..  This pump was also unsustainable and USO/oil fell back to $114.59 on 13.2M shares traded.

After hours trading was very light (257,000 shares) into the Wednesday inventory report and Wednesday the 2nd opened at $113.81 but, despite additional builds in inventory, a massive frenzy of trading took USO/oil up $3.03 for the day on big volume (18.1M shares).  This was the only positive trading day of the week as Friday opened flat at $116.79 and closed flat at $116.82 on a shortened trading session.

So, in summary, over the course of the past 5 trading sessions, in regular trading on volume of 66.8M shares traded, the USO/oil gained a net grand total of $0.34.  In the after hours market of those same 5 sessions, on a volume of just 2.92M shares (4%), oil was pumped up $3.36. 

That's 91.8% of the gains being made on 4% of the volume during electronic trading - just another typical week of oil scamming that cost us consumers an extra $77.7 million per day for the $3.70 increase in crude. 

What can we do about this?  Well, for one thing, you can send this to everybody.  The more people watch this sort of thing the more likely it is that we can put a stop to it.  Consider it a sort of neighborhood watch group to take a bite out of oil shenanigans.   

The American people are being robbed by traders who are able to leverage borrowed cash 15:1 to use light, after-hours trading on electronic exchanges to drive up the price of oil consumed by Americans by $544M in just one week, manipulating the market to reflect prices that simply do not prove out in regular trading. 

Congress has been holding and continues to hold an investigation into various speculator practices and we will be delving into those further this week.  This blatant sort of manipulation is just one of the ways that oil price is manipulated by a cartel of speculators who are robbing US and global consumers of Billions of dollars each and every day while funneling campaign contributions to certain corrupt politicians who filibuster or veto well-intended legislation meant to combat the practice.

Only by making the people aware of what is happening, only by waking the voters and removing these "evildoers" from office can we effect real change on this system, which is sucking $460Bn a year out of the pockets of American citizens as oil trades well above the $85 "fair" target price based on the most generous interpretation of supply and demand.  You CAN do something, tell your friends, write your representatives - let them know you are watching!

Comments

[Tao]

Can't that happen with any stock?

[User1]

First, it is not clear that futures trading directly impacts the price of gasoline at the pump.

Second, if the vast majority of trading is occurring at a different price than the AH trading, wouldn't the weighted average price be the important one?

[Calvin C.]

The author is right, the only way to save stocks & the economy for that matter is for oil to come down & after hours inside trading such as the type he described to be banned ASAP.

[NYCTraderC]

I really don't think using the USO data is a good approximation of actual Nymex trading. The trading of the USO is done mainly by traditional equity funds that don't have access to commodity futures trading. As a result, both the volume and sometimes price of the USO can be horribly out of line when compared to the Nymex front month contract. Further, oil is traded around the globe on several exchanges. Admittedly, not all are the light, sweet crude variety featured on the Nymex, but I personally believe the overnight trading of the DME Oman Crude, the ICE Brent Crude, etc., has a larger impact on Nymex than the overnight trading of USOs.

I don't necessarily disagree with your point that speculators are driving the market or that, in limited cases, there is actual, explicit manipulation occurring. However, I disagree with your methodology as I don't think the USO corresponds to the crude paper trade that well.

To be honest, I think the USOs, UNGs, etc. are bogus.

[NYCTraderC]

Also, closing after hours trading on the Nymex would do nothing as oil is traded on other exchanges.

[mangolfer]

I want to see some people hang for this price manipulation!!

[Rabbito]

"duh of course it can, but this aint any stock, it is the fuel for our society and thus should be treated differenty. \r\n\r\nI really don't understand people. People always fight for the rights of the rich and not the average person paying $4.50 a gallon. People like tao."

[Philip Davis]

NYC - I agree its not the best model but 99% of the audience can see the USO for themselves, if I use the NYMEX volumes (which I'm not clear that I'm allowed to) then only a very select few could see the trades I'm talking about. There is a surprisingly tight correlation between NYMEX and USO volumes, especially in the light trading sessions after hours.

Absolutely there is no point in restricting the NYMEX if you are going to let Dubai and ICE run free, the joke is that ICE was started by the very people that Congress say are "legally" manipulating the NYMEX trading so who knows what they are pulling over there, without any oversight at all.

The fact that you can't track trading activity on the NYMEX the way you do other stocks and futures just goes to show you that it would benefit from having a little light thrown on the process.

In any case, ignoring USO, the price action of oil's opening and closing prices was within 0.25% or less of USO each day and that's the crux of this arguement - in either view, 90% of the upward price action was accomplished in low-volume pre-market trading and, had it not been for the daily surge of buying into the close, we would have had negative intra-day numbers for comparison.


Even this mornign, up until floor trading opened at the NYMEX at 9am, prices were being held up with a clear floor being put in at $142.50 ($115.50 on USO) right up to the bell, were it almost immediately dropped to $141 on volume trading.

We're putting this and other information we have into the hands of the people running the investigations and we'll be putting up other interesting "talking points" on oil this week. If there is no speculation in the oil markets, then they have nothing to fear as it's all talk. This will be a great chance for energy bulls to show us the money and pick up a bargain at $140!

8-)

[Sophisse]

So your thesis is that the after-hours trading bumps the price up an unreasonable amount. Did I understand properly?

Here's my question: when the reasonable high-volume people get to work and start trading, why do they trade at those unreasonable bumped up numbers? Why don't the buyers just sit on their hands for a half hour until the unreasonable gains disappear?

Without an explanation for that, your theory doesn't hold too much water imho.

[Shaggieman]

I am in favor of closing all after hours trading!

[Mmarrkk]

Why close afterhours trading? What is so special about the arbitrary time periods when one floor is open? Why not make everything 24 hours a day? And since when were we allowed to make laws that govern the actions of other people in other countries?

Like the looney tunes idea of prosecuting OPEC for price fixing because it is against the law in the US? Guess what, they don't live in or trade in the US. We go to them to buy oil. So we have to abide by their rules. They don't have a price fixing law, so don't see where you have much of a case. I may not like it, but that's reality.

But if you like, someone in Saudi Arabia said they don't like Phil's shirt. Their law is that you can't wear that shirt. So, Phil is being sued to not wear that shirt in a country where he doesn't live or buys shirts. Make sense? Of course not and so does prosecuting OPEC.

And for all the whiners complaining that OPEC won't produce more oil, Mr. Kettle, meet Mr. Pot. We arbitrarily block off large portions of our country from exploration and development but want other countries to produce more. How hypocritical.

[[e-mail]]

The reason that manias like the current run up in oil prices get started is because there is a great deal of money to be had from these manias. Existing investors (mostly very wealthy private individuals who have access to think tanks and public relations specialists) manufacture news stories to create excitement over a particular area of investing, we'll refer to these savvy propagandists as "Sharks".

The general mass of American investors are like a room full of overstimulated children, they act without thinking things out. We'll call these who are more excitable than they are informed our "squid"; they eat up investment house propaganda and call for the push of more and more capitol into a given market. Fundamentals of value based investing are thrown out the window, and irrational investment choices and unfounded exuberance are the rule of the day.

When the market has reached a critical peak, and the Sharks decide its time to cash out, they walk away from the table after selling shares in a market that's bloated with funds from less savvy investors. News of key investors dumping shares starts an investment calamity that sends the squid into a frenzy and results in falling markets and evening news stories about people losing their retirement investments.

We've seen this once with tech stocks, then again with real estate, and now we're seeing it in oil. How many times does everyone have to see this happen before they finally catch on?

Oil prices will come down as soon as those who manufactured this run up in oil prices are able to cash out, and in so doing, walk away from the table with a sizable share of cash that less savvy investors have dumped into the market.

[Old Mule]

While manipulators may be able to move the price more in thin, after hours trading, greed and the fundamental forces of supply and demand should tame their ability to manipulate prices in the long run. Greed means that after hours prices that are run up artificially will be brought down from the profit taking of those who are long the next day. Both short sellers and those with a long position will jump on a situation they believe is overpriced. This acts as a check on upward price manipulation.

If this price run up were really only about manipulation, why didn't it happen five years ago, or ten years ago? There has been a fundamental demand shift because of India/China, etc. while supply has remained stagnant, and this is what is really behind the run up in oil prices. Rather than dumping blame on the commodity markets, our governments need to focus on supply (allowing more drilling) AND demand (promoting new technologies) and the speculators will eventually have the rug pulled from under them.

[mike00501950]

I have also heard alot about OTC trading which is not reported to the government nd would be a perfect means for buying futures contrcts and manipulating the price of oil. The CFTC needs to make these guys accountable but the head jackass at CFTC really sees no problem with the way things are. Must be that he's making a whole lot of money and I'm sure would like to preserve the status quo. This entire business is rife with corruption and I have contacted my congressional representative and told him that things must change. If Congress will not move on these issues then we must move on Congress and send the incumbents a clear message.

[YogiG]

Great Article....We have know that there is calculated spec manipulation going on all the time...it would not surprise to learn that those few traders were select shills of several WS power firms...need i name names...
we need a large overhaul of how this country and "Bush/Cheney/Kudl... Goldielocks Economy works -oops, I mean destorys our way of life...
G

[Dan Walker]

Phillip, I love reading your columns and I agree with you on a great many things. Here, however, I think you are smoking crack. What are the odds our lame-ass congress will "round up the people placing these orders and start asking them some pertinent questions" when the Secretary of the Treasury is a past chairman of the company behind it? I have watched the NYMEX night sessions for the last few months and you are absolutely correct. But to think anyone in DC will do anything more than piss and moan is a joke. Let the market work. It can deliver a more pointed lesson than anyone in Washington.

[starkoski]

Phil, you are such a ninny. You really need to settle down, be objective and really really learn about Peak Oil. It is staring you in the face and will take your investments into the abyss.

[alajac]

The road to deflationary depression is paved with "well-intentioned legislation" (like the Federal Reserve Act). I have no use for Repukes but am glad somebody is slowing the madness, even if only for another few months.

[Adolf]

I don't understand all you people getting exciting about profiting from the supposed "peak oil" it is clearly all a hype, If it were true the last thing I would worry about is trying to make a buck from it and start worrying about society collapsing as all these theorists say. All these dollars your making wouldn't be worth anything anyway

[StevenK]

Everytime I hear that "they" are manipulating the market and cheating "us" of money, a big smile appears on my face. That a market is being manipulated is the sweetest news to a would-be speculator just as the words "random walk" should bring on a frown. If Mr Davis is so confident in his theory, then this knowledge could be used to wrest untold millions from this market... I dare him to try.

[Plantinseeds]

As time goes by..........

Speculation, manipulation lmbo. Wake up people, thats what futures, stocks, ETF's and options is all about. Has been, is now and shall be till, well till we are done.

Supply and demand has a tiny role in this. Manipulation has a whole lot to do with this but not the manipulation yall are talking about.

You all need to start paying attention to whats going on in Syria, Iran, Lebanon and Iraq.

I would suggest that you all bookmark this page. Oil is cheap right now. If things continue to go as Iran has planned.....
$200 per boe by this time next year...or sooner.
May I suggest those that are not in the best of shape to sign up for yoga classes asap-your gonna need em.

[Kunst]

Margin requirements all the way up to 7% (almost)! They were 10% for stocks in the 1920's. Not that there's any similarity of course.

[ICouldBeWrong]

StevenK exactly! If Mr Davis has detected a pattern in the market (manipulation of not) then why not profit from it?

Honestly sometimes I'm tempted to sell at noon Chinese time and buy at noon New York time myself.

[Sverker]

I read an interesting article somewhere that the main factor influencing the price of oil today is the expectations of the future price of oil. If the future price is _expected_ to rise because because the investors/speculators believe that the output is going to have a hard time keeping up with demand, then the price is going to be bid up already today. That would explain the run up in the last 12 months, because the peak oil theory is really starting to take hold among oil executives and analysts in an unprecedented way. They might not call it peak oil, but even they admit that the supply coming online in the next 5 - 10 years is much less than previously supposed (i.e. IEA & EIA ), and is going to have a hard time to satisfy demand. [ Of course actual supply and actual consumtion is sure to be balanced also in 5 or 10 years, the question is at what price the equilibrium will be ].

BTW, also producers can adjust their output to reflect _their_ belief on what future oil prices are going to be, and you can see that whereas 6 mo. ago the OPEC ppl where quite "happy" with 90-dollar oil, now they are already predicting prices of $170.

[inthewings]

Ok, so what are the names of the reps in congress who "allow" this to continue? Surely their names aren't proprietary? And what bills, exactly, are being stymied?

[john s.gordon]

speculators - off with their heads.
> jack

[notsosmart]

everything has turned into a bottom line scam.believe nothing & nobody.

[[e-mail]]

The problem I have with manipulation of commodities markets by those in the know is that it amounts to a centrally planned economy. I'm not a socialist or a fiscal monarchist, and I don't believe in having a centrally planned economy for the benefit of a small cadre of party elites who willingly subject the masses to economic hardship for their own financial benefit. If you want a centrally managed economy with perks for party insiders then move to China.

[Jack Yetiv]

Even accepting the methodology, I believe you may have proved the OPPOSITE of what you intended to prove. To wit:

1) Your assertion: After hours manipulation is costing us half-a billion dollars a day.

MY THOUGHTS: How does trading a relatively small percentage of AH contracts do that? Seems to me that what consumers pay at the pump would be related (at most) to the average of ALL the contracts sold. If the "manipulated"... contracts (AH) only account for a few percent of total contracts traded, how can that have a meaningful impact on ALL contracts traded?

2) These speculators are getting rich.

MY THOUGHTS: If the speculators bid up contracts overnight, only to see them lose value the next day, how exactly are the overnight buyers getting rich? By buying high and selling low?

Jack

[cmetrader]

John,

Phil has been short oil since 50 and posting this stuff. Why do you think he writes these articles? It is to lure people to his paid site for $1000/year. He needs to make up for his oil trading mistakes! Phil makes money by paid subscriptions, not by trading. Know that. I am sure he will reply with his 200% put gains this week. But remember, they have been rolled 15 times and are hiding countless wiped out options. Phils option gains are very similar to the oil market.

[edit5410]

Anyone for 0% margin? Now that's a thought. A quasi-govt agency, the CFTC, raises margin to 9,700+- in May, but publically states they haven't and don't interfere with markets which have gone up slowly. Can we get Wendy Graham, Phil's wife, former chairwoman of the CFTC to opine. [She was hired by Enron]. Or could we get Phil to opine who slipped the Enron loophole into the CFTC reautho bill at the 23rd and a half hour without debate. He's advisor to McCain now. Why don't we just accept capitalism is based on greed and our govt is too corrupt to suggest that maybe some of the greediest might need to be modulated. Why is $9,700 the correct margin? I saw a blip on CNBC today listing Paulson as a possible "savior" for the economy. I had pretty much catagorized and became comfortable that the "talking heads" couldn't say anything stupider than the "last time", but there they go again. If anyone believes Paulson represents the interests of everyday citizens, take another toke, cause you've got some good stuff.

[bill d]

Speculating on speculation & speculators sounds like a full time job for a moron. Thanks.

[bindlepete]

Lets take another view that the Plunge Protection Team of the President, which has openly operated in the Equities Market has now invading or has transfrered it's activities to the NYMEX and oil in particular.

The administration has manipulated markets and may well be holding down the oil prices on the NYMEX by promising their designated sellers that they will be indemnified against loss by either payment or replacement of sold volumes from the SPRO.

No markets are off limits to this Administration. That is clear.

[p2pjournalchief-editor]

Absolutely, this article explains everything. This irrationally high oil price is driven the Wall Street. Investment Bankers are "bed" with Traders. Unless the government passes the law that completely outlaw such a practice, we will continue have this kind of problem. Another problem is that the American Financial Market is already out of date. Most time, the market can be cornered by one big players or a team of players. We need to develop a system that can counter such an issue. The big players need to show their real positions (sometimes, big players sell from one account to account, purely to jack up the price.) 95% of transactions are phantom transactions. There are meant to show that there is a heart-beat in the market. And, the market makers have forsaked their true responsibility to keep the market stable and liquid. Instead, they think that their job is a profit-center and uses volatility to cheat mamas and papas (small investor). The American financial system needs to be overhauled to have at least two market maker for a given financial instrument.

[agentwebb]

If congress would promote the uses of American energy sources such as coal, oil, nuclear, and more, this article would not mean anything. Consumption is half the issue, Producing our own energy is the other 1/2. The joke is on us for allowing speculators and enviromental wackos to run our energy policy.

[Philip Davis]

I would urge anyone who wonders if the NYMEX is fixed or not to look at the action on USO, which mirrors what happened at the NYMEX today. Oil was up slightly for the day at $138 ($111 on USO) until 1:50 when it went up another $1 in the next 20 mins. Then at 2:24, just 10 mins before trading halted at the NYMEX, MASSIVE buying kicked in, driving crude up $2 in 2 minutes. In the end the front-month contracts finished the day up $5.60 while 2011 and longer contracts gained just $3 or less.

They popped oil up so fast at the close that it doesn't even register on the NYMEX chart: futures.tradingcharts....

Not only that but the open interest level of contracts actually decreased today to just 223,504 and I will guarantee you right now that at least 180,000 of those contracts will be rolled forward into Sept (229K), Oct (93K), Nov (62K), Dec (178K) or Jan (32K).

futures.tradingcharts....

Also you'll notice in the above chart that in Feb-Nov 2012 with the exception of June, NOT ONE barrel of oil has been traded since oil was $70. That's a whole year where none of these "legitimate hedgers" thinks they are going to need oil I guess...