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

[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.

2008 Jul 07 08:52 PM

[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.

2008 Jul 07 09:36 PM

[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

2008 Jul 07 10:38 PM

[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.

2008 Jul 08 12:19 AM

[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.

2008 Jul 08 12:30 AM

[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.

2008 Jul 08 12:57 AM

[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.

2008 Jul 08 12:58 AM

[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.

2008 Jul 08 04:08 AM

[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?

2008 Jul 08 10:46 AM

[john s. gordon:]

speculators - off with their heads.
> jack

2008 Jul 08 11:12 AM

[notsosmart:]

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

2008 Jul 08 11:32 AM

[LilBob:]

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.

2008 Jul 08 12:16 PM

[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

2008 Jul 08 01:41 PM

[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.

2008 Jul 08 02:15 PM

[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.

2008 Jul 08 04:29 PM

[bill d:]

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

2008 Jul 08 04:37 PM

[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.

2008 Jul 08 09:26 PM

[p2pjournal ...:]

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.

2008 Jul 10 12:31 AM

[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.

2008 Jul 10 12:39 PM

[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...

2008 Jul 10 05:54 PM