The Great Cross Market Crude Oil Speculation Scheme of 2008

Includes: BP, FRO
by: Bob van der Valk

The gated community of Rancho Santa Fe has not seen so much excitement since Michael Blevins, owner of now defunct diet pill maker Metabolife, was the center of attention after being accused of federal tax evasion in July 2002. On Tuesday, May 24, 2011 the Commodity Futures Trading Commission (CFTC) charged three oil companies and two individuals with manipulating crude oil futures.

The name of one of the accused, of being an oil speculator, is Nicholas J. Wildgoose, who operates Parnon Energy of California at Rancho Santa Fe, CA and advertises his crude oil trading and marketing expertise on a website.

The other defendant is James Dyer now lives in Australia. The CFTC said James Dyer and Nick Wildgoose — former senior traders at oil major BP (NYSE:BP) — directed the manipulative trading scheme in conjunction with Norwegian tanker company Frontline (NYSE:FRO). The complaint, among the agency's biggest charges of wrongdoing in energy markets, said the scheme yielded more than $50 million in unlawful profits.

The two traders are currently working at Arcadia and Parnon Energy, which is controlled by Cyprus-based Farahead Holdings, which is controlled by Norwegian shipping magnate John Fredriksen who runs Frontline, one of the world's largest tanker companies.

The scheme was easy to work with the linkage between physical and derivative commodities being manipulated. Parnon, with offices in Oklahoma, owns 3 million barrels of storage facilities at the West Texas Intermediate (WTI) crude oil delivery point Cushing in Oklahoma. Arcadia is a major global oil trading firm, which typically markets about 800,000 barrels a day of crude and product around the world.

Both are controlled by Fredriksen's Farahead Holdings, based in the Independent Republic of Cyprus, an island in the middle of the Mediterranean Sea. Both Parnon and Arcadia have Greek origins in their names and the island was controlled in turn by Greeks, Turks and the English and is located in very strategic part in world of oil shipping.

The alleged price manipulation of WTI crude oil took place in the first four months of 2008. The following chart, compiled by Michael W. Masters, Masters Capital Management and Adam K. White, White Knight Research & Trading, shows the wild price gyrations

(Click to enlarge)

Prices go up, when index speculators pour large amounts of money into the commodities markets and buy large amounts of futures contracts. The inverse happens, when they pull out large amounts of money by selling large amounts of futures contracts. These large financial players are the primary source of the recent dramatic volatility in crude oil prices.

The CFTC complaint alleges that Parnon took part in a cross-market trading scheme in 2008 with two other companies involving the accumulation and sell-off of "a substantial position in physical crude oil" to manipulate futures prices and made an unlawful profit of $50 million.

This is a civil not a criminal enforcement action filed in the U.S. District Court for the Southern District of New York. It states that from January through April 2008, the participants traded futures and other contracts that were priced off of the WTI crude oil posting and manipulated the price in order to obtain their illegal profits.

The three companies would first purchase large quantities of physical WTI crude oil barrels without any intention of shipping them into their Cushing, OK, storage tanks

According to the civil lawsuit it is alleged they did so "pursuant to their scheme to dominate and control the already tight supply" at Cushing to manipulate the price of WTI higher and profit from the increases in WTI futures and options. They allegedly also bet short on the WTI instruments at artificially high prices. They would then sell off their physical holdings of WTI "mostly on one day" to drive the WTI price back down and profit from their "short WTI derivatives" bets.

The two individuals and three companies are being sued to disgorge their unlawfully made profits of $50 million dollars and may be fined an additional $150 million if found guilty.

Arcadia has been implicated in oil squeeze plays in the past. In 2000, U.S. independent refiner Tosco filed a lawsuit alleging Arcadia and others colluded to control a large chunk of the physical Brent crude market in order to drive up prices. Arcadia later settled that suit for an undisclosed sum.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.