Seeking Alpha

Chris Cook

View as an RSS Feed
View Chris Cook's Comments BY TICKER:
Latest comments  |  Highest rated
  • The Global Oil Scam: 50 Times Bigger than Madoff [View article]
    As I was extensively quoted by Phillip I thought I might comment.

    I gave evidence to the UK Parliament's Treasury select committee last year on the subject of oil market regulation, and my position is that the global oil market structure is now entirely dysfunctional and sociopathic.

    As I said in this interview


    investment banks are like submarines - beautiful pieces of engineering with a malign purpose. Trading intermediaries have an interest in opacity and in volatility, so don't be surprised if the market platform they implement, own and control operates in an opaque and volatile way. You don't let the submarines run the convoy system.

    I think Phillip maybe misses the point that producers are probably up to their neck in this global manipulation, because they are the principal beneficiaries from high oil prices, and of course producers essentially store oil in the ground at nil cost. While the long standing close relationship between BP and Goldman - and their totally comprehensive knowledge in respect of every barrel that moves - probably puts them in a better position than any other middlemen, I suspect that the Saudi trading and financing strategy would be an interesting study.

    The problem the oil producers have is that gradually inflating the oil price with money borrowed from funds is essentially like a car with no reverse gear, or the shark that dies if it stops swimming. Massive 'macro' volatility is built in to the system, and of course this is where the middlemen make their money, from both producers (to whom it is a tax) and consumers (to whom it is an additional cost burden).

    But the producers I have talked to, including one OPEC oil rep, made it quite clear that they regard oil price stability as being as important as an oil price that reflects the increasing scarcity and costs of exploration.

    I believe that a global Energy Commission should be convened without delay to investigate the operation of the global energy markets, take evidence from all stakeholders, and make recommendations for a new global market architecture - I would envisage an International Energy Clearing Union based not upon new global institutions (we have enough of those), but upon globally valid agreements and standards.
    Nov 11 06:51 PM | 45 Likes Like |Link to Comment
  • The Global Oil Scam: 50 Times Bigger than Madoff [View article]
    @Mark Anthony

    My analysis is that the true speculators are the intermediaries who are borrowing money from funds (probably captive) and lending it to producers. In return, producers are lending - ie selling forward oil contracts like 21 day BFOE - to the funds. This is going on OFF exchange, but has an effect as and when BFOE cargoes are delivered.

    WTI has long been a zombie contract leaning on the BFOE price through the arbitrage on the ICE platform.

    ETFs on the other hand, who are getting the blame, are IMHO the opposite of speculators. They are off loading the price risk of dollars and taking on energy price risk. Producers hedging are doing exactly the opposite - ie they are off-loading energy price risk in favour of dollar price risk. IMHO ETFs dealing on-exchange add much needed liquidity to the exchanges in their principal role of risk transfer. It is the middlemen who have an interest in opacity and volatility.

    Sooner or later the oil price reaches a point at which demand destruction of products blows back to crude oil itself, and the cost of buying in cargoes of crude oil to support the oil price becomes unsustainable. Then the price rapidly collapses through the need to deleverage, as is the case with every bubble.

    The futures market is pretty much entirely irrelevant: it is the tail, not the dog. The only way of affecting the benchmark Brent/BFOE physical market price is by having the capability of making and taking delivery of BFOE crudes. Funds categorically do not have this capability, and their exchange clearing brokers - unless entirely mad - will generally not allow their positions on any deliverable contract (and note that the ICE BFOE contract is cash settled) to be held anywhere near expiry.

    I think that six years spent managing the deliverable IPE Gas Oil contract gives this view some authority.

    In my view the simultaneous spikes of oil and metals last year,and the correlation of oil and other asset prices - eg the Dec WTI and S & P demonstrates conclusively that commodity prices have lost touch temporarily with the real world price determined by physical supply and demand.

    The forward curve of commodity prices is mirroring the forward curve of the money price (yield curve), and this phenomenon is what you get at the 'zero bound' in what Keynes called a 'liquidity trap'.
    Nov 11 07:55 PM | 17 Likes Like |Link to Comment
  • Something Very Strange Is Happening With Treasuries [View article]
    QE is public credit, and the convention has been for 300 years that credit must necessarily come from private credit creation, which is of course more expensive to the tune of dividends on the capital underpinning it.

    Provided QE is professionally managed by someone with an interest in the outcome - and under the supervision of a Hong Kong style monetary authority (HK has never seen the need for a central bank) - then it can and should be used as the source for financing of productive assets, and whether these are in public or private ownership is irrelevant.

    In this model banks become credit managers and service providers, not credit intermediaries.

    QE used to fund consumption, on the other hand, is the Zimbabwe approach.
    Feb 24 11:21 AM | 16 Likes Like |Link to Comment
  • Gold, Silver, The CFTC and Conspiracy Theories [View article]
    In my view, as a former regulator myself, J PMorgan have been the Fed's agent in manipulating the gold market pretty much since the old man J P Morgan himself. For a long time that was all about monetary management - in recent times it's probably been more about putting idle assets to work.

    But I confess I find it hard to get upset about manipulation of what is essentially a financial asset with little use value other than that manipulation is intrinsically unethical and wrong. A fellow regulator used to joke that if unacceptable and excessive market manipulation is a US felony that must mean that there is such a thing as 'acceptable' market manipulation. To which my response was that 'acceptable market manipulation' might be a good definition of 'trading'.

    Joking aside, in my view manipulation of silver and gold is no laughing matter, but is a side issue by comparison with the manipulation which has been going on in the oil market from about 2006 onwards.

    This has nothing whatever to do with speculators like hedge funds or bank prop desks - which cause volatility in a zero sum way - and everything to do with the fact (IMHO) that producers (Shell were the first, quite openly and legitimately, to put idle oil stocks to work in this way) are financially leasing oil to investors such as ETFs (who are hedging inflation, and doing the opposite of speculation) in return for borrowing dollars at nil cost.

    By using financial oil leasing in a parallel way to gold leasing, oil producers are therefore able to keep the oil price supported or pegged - for all the world like an oil currency - at or near the upper bound where demand destruction sets in, as opposed to the lower market clearing level of marginal cost.

    There's nothing new about such producer support/manipulation eg tin pre-1985, copper (Hamanaka), coffee, even diamonds. It takes place through the opaque Brent/BFOE complex of paper oil forward contracts which controls the global oil price. WTI has now lost, since the Saudis went to ASCI, any residual relevance it had to global oil pricing.

    The resulting persistently high oil price has infinitely more harmful effects on the US economy than any manipulation of gold and silver, which does, to be fair, adversely affect investors and is wrong for that reason.

    It surprises me that US politicians seem to have totally the wrong end of the stick in relation to oil.
    Apr 2 10:14 AM | 14 Likes Like |Link to Comment
  • What’s Really Behind QE2? [View article]

    Interesting article as ever, but I think you share a widespread misconception re 'speculation' and commodity prices and I'd be interested in views on my take, which is based upon 25 years in market development and regulation.

    My definition of a 'speculator' is an investor in search of transaction profits. There are plenty of those about, including hedge funds; prop desks of investment banks, and physical trading operations like Cargill, ADM and so on.

    'Speculators' are agnostic as to market direction - since they can go short or long - and not only welcome volatility, but will actually cause it.

    In my view the tidal wave of money which has swept into commodity markets does not come from such 'speculator' investors - particularly not banks who no longer have the capital to support anything other than micro short term trading/ speculation and are closing their prop desks for regulatory reasons in any case. It rather comes from investors holding dollars who - at the 'zero bound' of interest rates - aim to 'hedge inflation' by buying into ANYTHING but dollars, and whether these assets are interest-bearing or not is irrelevant to them.

    These 'inflation hedgers' typically invest through ETFs and ETCs and get pillaged by the market intermediaries with their 'asymmetric' information; commissions; bid/offer spread; and manufactured volatility aka manipulation.

    'Inflation hedgers' are 'long only' and are off-loading dollar risk in favour of commodity risk which is, for those familiar with commodity markets, the precise opposite of how producers 'hedge' by offloading commodity risk and taking on dollar risk.

    In other words, these investors are doing the precise opposite of speculation: their motive is not to make a profit, but rather to avoid a loss: it is not Greed, but Fear.

    That is not to say that all is well with commodity markets. IMHO these markets are now entirely financialised, dysfunctional and are no longer fit for purpose.

    What is now happening is that producers are making out like bandits, because they are able to support the market price at the upper bound where demand destruction sets in, rather than the lower bound where the 'least cost' producer alone survives.

    Anyone familiar with the history of commodity markets will know that if producers CAN support prices at high levels, then they WILL: eg the 1985 tin crisis; any number of other cartels eg coffee and cocoa; and above all Sumitomo/Hamanaka in copper who - with the connivance of investment banks and metal brokers - manipulated the copper price for 5 years before being rumbled and then for another 5 years after that.

    So QE has indeed found its way into commodity markets, since at the 'zero bound' investors' dollars have nowhere else to go. QE2 can only make a bad situation worse.

    I think that the only solution is to entirely re-base and re-architect the monetary system via a Bretton Woods 2,.

    I think that the rest of the world will shortly oblige the US to participate in just such an initiative. This time,however, the US will come to the negotiations as a debtor rather than a creditor nation......

    Interesting Times, indeed.
    Nov 20 08:29 AM | 12 Likes Like |Link to Comment
  • Peak Oil for Dummies [View article]
    Those who say that there are huge reserves of oil are correct.

    But the Peak Oil argument is not about that: it's about a peak level of production, and the amount of energy and environmental destruction necessary to maintain even current levels.
    Aug 9 01:25 PM | 12 Likes Like |Link to Comment
  • CFTC Belatedly Discovers the Speculative Oil Bubble [View article]
    I'm sorry,Sean, but I think your analysis is flawed. The only people who can affect the physical market price are those who are capable of making and taking delivery.

    Funds are not, and it makes no difference what they are doing in month 2 or earlier month futures contracts, since they will be obliged by their clearing members (irrespective of what the exchanges provide) to get the hell out of contracts long before the expiry date.

    On what basis do I say that? Well I oversaw the deliverable IPE (now ICE Europe) Gas Oil contract for six years and saw anything up to 400,000 tonnes delivered in the second half of a month. We (IPE and the clearing house) never considered for a minute that we needed position limits, although we kept a close eye approaching expiry.

    The market that actually sets the benchmark crude oil price is the BFOE complex of contracts, and particularly the 21 day forward contract of 600,000 barrels. The global oil price is based on the price of spot (Dated) cargoes arising from this this contract either directly (60%) or indirectly through the ICE Europe WTI/BFOE arbitrage (most of the rest).

    Since a month's production of not more than 70 cargoes is worth around $3bn at today's prices, it really is quite easy for the big boys to secure these cargoes with forward contracts and kick the price around like their own priivate football.

    It's no wonder that the banks are happy to have position limits on exchange, because it makes not a blind bit of difference. In fact, it forces ETFs into the opaque world of OTC swaps if they still want to play.

    IMHO ETFs attempting to hedge inflation provide much needed liquidity for producers trying to hedge. The villains of the piece are the true speculators - ie the trading and financial intermediaries currently laughing up their sleeves.

    There is no "London Loophole" , but there IS a global "Physical Loophole".

    Why do you think the canny GLG hedge fund is getting into the physical oil trade? Because that's where the money is.

    I believe that a joint Transatlantic Commission - maybe made up of Senator Levin's sub-Committee on Investigations and a sub-committee of the UK parliament's Treasury Select Commitee (to whom I gave evidence this time last year) - should investigate the dysfunctional Brent Complex and make recommendations for an alternative market architecture which actually acts in the interests of consumers and producers, and is served by intermediaries, not owned, controlled and exploited by them for huge profit.
    Jul 31 04:03 PM | 12 Likes Like |Link to Comment
  • What Oil and Gas Are Telling Us Now [View article]
    @ Offthepoint

    There is no mechanism for 'shorting the price' of physical - as opposed to paper - natural gas. The financial bets on CME/ICE Henry Hub have no more effect on the physical market than if I bet you that prices would fall.

    The drop in US market prices is due - as it always is - to oversupply in the US market for physical gas, exacerbated by the fact that storage of natural gas (unlike, say, gold and copper) is extremely limited.

    The reason IMHO for the increased differential is that crude oil and oil product market prices have been supported by producers at the 'upper bound' level at which demand destruction sets in.

    They have been able to do this through the presence in the market of billions of dollars from risk averse investors -motivated by fear, not greed and speculative transaction profit. So with the assistance of investment banks etc, ETFs have been borrowing oil from producers and lending them dollars interest-free in return.

    Whereas natural gas has fallen to the 'lower bound' where production destruction sets in, and the last man standing is the lowest cost producer.

    Natural gas markets are, as this excellent article points out, fragmented by the absence of infrastructure, and do not have the necessary global market infrastructure to enable the price to be supported by producers - which they would always do if they could - even were the market not overs-supplied.

    @ Ferdinand Banks

    You are normally fairly astute, so I will treat this dumb comment as a hung-over New Year aberration.

    For your information, in order to access all this Far Eastern 'long green' Gazprom will need to spend gazillions of dollars they do not have, plus a great many years, in adequately accessing these markets.

    In the meantime they are at one end of the pipeline, and Europe is at the other, and the mutual dependence will continue.
    Jan 1 08:50 AM | 10 Likes Like |Link to Comment
  • New Job Opportunity - Spitting at the Moon [View article]
    I confess I'm struggling to see where the purchasing power for genuine demand is going to come from now that 90% of US citizens are in debt to the other 10% who own almost all unencumbered US wealth.

    I certainly don't advocate the State getting between citizens but how can the private sector get economic activity re-started without compound interest and private property concentrating wealth even further?
    Sep 5 08:22 AM | 9 Likes Like |Link to Comment
  • Why Oil Is Not Safe for the Individual Investor [View article]
    I agree that oil is currently unsuitable for retail investors, and I largely agree your list of conclusions. But I suggest that your analysis is slightly flawed re storage.

    The FT Alphaville blog picked up last week on my view

    I think that oil storage by speculators is pretty much de minimis in comparison with oil flows, and only relevant to extremely short term trading games, particular in products, that take place among consenting adults.

    I think that we have been seeing oil producers - certainly one oil major, and quite possibly one sovereign producer - using two market strategies, facilitated by investment banks.

    Firstly the relatively recently created ability for oil investors to 'lease' or 'borrow' from producers the oil stored for free in the ground. It was Shell who first astutely worked out this quite legitimate strategy and implemented it in 2005. Why hedge oil price risk in futures markets when you can cut out the middleman and hedge directly against an ETF who wishes to assume that risk?


    Secondly, what Mike Riess calls Modern Market Manipulation


    In the case of oil we are IMHO seeing one, maybe two, producers supporting the global oil price through the Brent/BFOE complex, (WTI is subordinate to that and has been for years) where only maybe $3bn to $4bn of production each month now sets the global market price. They are essentially able to do this doing by using as leverage those energy funds invested with participating investment banks - 'structured finance' etc.

    In essence we are seeing the following outcomes from this current manipulation which has been going on since maybe 2006:

    (a) Producers make large short term profits from higher prices, but in the medium and long term the massive volatility destroys their ability to budget and invest;

    (b) Consumers overpay to producers, and pay a volatility tax to middlemen;

    (c) Investors pay a massive volatility tax to middlemen, and as you say, should keep out of this rigged casino;

    (d) Middlemen - make out like bandits.
    Dec 21 09:50 AM | 9 Likes Like |Link to Comment
  • U.S. Monetary Policy in the 2010s: The Mankiw Rule Today [View article]
    These 'rules', and the completely discredited Economics of which they are part, are complete fantasy due to their basis in ideological assumptions with no grounding in reality.

    In the situation we are now - and will be indefinitely, absent systemic fiscal reform - Central Banks are as much use as a chocolate teapot.
    Jun 5 09:09 AM | 8 Likes Like |Link to Comment
  • Squatters: 4.4 Million and Counting [View article]
    @User 353732

    There's a big difference between the sort of squatting you are talking about (where your points are valid), and the situation where banks permit occupiers to stay in properties, and (presumably) to pay property taxes which for which the banks would otherwise be liable.

    I wouldn't call that situation of 'permitted occupation' as being 'squatting', actually.

    'Pemitted Occupiers' would (presumably) be keeping the property in good order,which is again in the bank's interest, and could be seen as a form of 'rental' paid in kind. It might be a good idea for banks to formalise this relationship in some way.
    Apr 25 09:46 AM | 8 Likes Like |Link to Comment
  • Recession Is Over: Long Live Depression [View article]
    Austrian analysis of debt-based economies is correct up to a point, - and demonstrably superior to the conventional nonsense - but it is essentially destructive.

    The toxic combination of compound interest on debt, and private property in land, has once again achieved what it always has for thousands of years - an unsustainable concentration of wealth in the hands of the few, to the exclusion of the many.

    If Peter has anything constructive to say about building a sustainable economy without unsustainable disparities of wealth, then I have yet to see it.

    We need a market based upon morality all right, but not one which assumes that the essence of morality is pure selfishness.
    Aug 2 10:03 AM | 8 Likes Like |Link to Comment
  • The Fed Backed Itself into a Corner [View article]

    Good post.

    "The problem is that the Fed can't help the Main Street directly."

    Correct. But the Treasury can.

    It seems to me that one possible approach -very much in line with the dis-intermediating effects of the Internet - is for the Treasury to issue credit interest-free as necessary (it costs nothing to create) and for Service-Providers (formerly known as banks) to manage creation and allocation of Treasury credit.

    A charge/provision would be made for the use of a Treasury guarantee, and for service provision. A new generation of banking service providers would receive performance related remuneration, and their capital requirement would therefore only be that necessary to cover operating costs.

    A US Monetary Authority (formerly known as the Fed) would set the parameters within which the system would operate. Hong Kong - which has no Central Bank - is not a million miles away from such a system.
    Nov 22 09:49 AM | 7 Likes Like |Link to Comment
  • Saudi Oil Pricing Paradigm Shift: WTI Index Out, ASCI Index In [View article]
    WTI has not IMHO been a global key for years, but has been almost entirely ancillary - since around 2000 (having been declining in relevance before that) - to the Brent/BFOE complex of physical/OTC contracts.

    This complex has been systemically manipulated in one way or another since it came into routine use as a benchmark in the '80s, and it is currently being used for the purpose of an arbitrage between the yield curve on dollars, and the forward price curve on assets generally, and oil in particular.
    Nov 11 10:04 AM | 7 Likes Like |Link to Comment