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Suprise-Speculators Blamed Oil Rise & Crude exceeds Gas / Crack Spread

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This topic contains 3 replies, has 1 voice, and was last updated by  Charles Randall 14 years, 10 months ago.

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  • #3739

    Charles Randall


    March 25, 2008 — AH! Now everyone suddenly is in agreement that speculators – and not market forces – have been responsible all along for the explosion in the price of commodities like oil and gasoline.
    The price of a barrel of oil dropped nearly 10 percent in recent weeks and other commodities declined significantly as well when, in the middle of the Bear Stearns crisis, speculators were forced to unload whatever investments they could in an attempt to raise capital.
    Their biggest recent profits were in oil, so – out the door those investments went. Financial newscasts – which usually cooperate shamefully with the speculators – suddenly changed their tune with questions like: “Is the commodity bubble over?” And, “Have the speculators been licked?”
    The answer: Not yet – even though oil dropped another $1.28 a barrel yesterday to $100.56. (You can bet that the fast money crowd on Wall Street will try to run crude up again on some wobbly pretense or another.)
    Also helping to keep commodity speculation alive is this: as long as the Federal Reserve is making interest rates cheaper, bailing out private companies, debasing the value of the dollar and – overall – stoking inflation fears, some people will be more comfortable in assets they can touch and smell.
    This is a speculator’s dream.
    But make no mistake about it, speculators – not Americans who drive too much, or Chinese who are beginning to drive or some stray storm in the Gulf of Mexico that causes a refinery shutdown – have been responsible for squeezing the family budget these past few years.
    What amazes me most is that Americans aren’t irate about this. Go ahead, punch a wall! Or at least slam down a toilet seat! Even better, kick your elected official in the rear and tell him/her to do something about it.
    I’ve been on this tirade for nearly two years now. Back in May, 2006 oil was $66 a barrel and gasoline was already more than $3 a gallon.
    The media was playing along, blaming hurricanes, South American and African countries and any other cock-and-bull notion conjured up by Wall Street. The trouble was, it wasn’t any of those things.
    The same folks who brought us the subprime crisis were also jazzing the price of oil – all those real and imaged problems around the world were just excuses for getting their way.
    Crude Futures Exceed Gasoline; Refiner Margins Hurt (Update2)

    By Nidaa Bakhsh
         March 18, 2008 (Bloomberg) — The cost of crude oil exceeded the
    value of gasoline for the first time in more than two years as oil
    surged to a record, undermining the profitability of refining.
         U.S. gasoline futures on the New York Mercantile Exchange,
    representing wholesale prices, normally cost more than the raw
    material, crude oil, to reflect the cost of refinery processing.
         The so-called gasoline crack spread, or price difference, fell
    as low as minus $2.465 a barrel earlier today, and was trading at
    minus 10 cents a barrel at 10:35 a.m. New York time today,
    according to Nymex data for contracts nearest to expiration. Over
    the past year, the spread was positive, with gasoline futures
    averaging $13.45 a barrel more than West Texas Intermediate, the
    benchmark U.S. crude.
         “A negative gasoline crack can only point to a continued
    overvaluation of crude oil
    ,” Olivier Jakob, managing director of
    oil consultants PetroMatrix GmbH in Zug, Switzerland, said in a
    report today. “On the basis of the gasoline crack, WTI is over-
    valued by at least $10 a barrel.”
         Before yesterday, the last time the gasoline crack spread
    closed below zero was on Feb. 14, 2006, when it settled at minus
    $1.404. It also traded briefly below zero on one day in February
    2007, according to futures data.
         The spread is calculated by converting the Nymex gasoline
    contract into U.S. dollars a barrel, then subtracting the crude oil
    price, which is already priced per barrel.

                                Crack Spread

         Crack spread data on Bloomberg reflects use of a newer Nymex
    gasoline futures contract from February 2007 onwards, the
    reformulated blendstock for oxygen blending grade, known as RBOB.
    Before then, it calculates the spread using an older version of the
    gasoline contract.
         Average retail gasoline prices in the U.S. reached a record
    $3.285 a gallon on March 15, according to the AAA, the country’s
    biggest motoring club, and were at $3.28 yesterday. Wholesale
    gasoline futures are trading near $2.54 a gallon on Nymex.
         Speculative purchases by investors seeking to hedge against
    the declining value of the U.S. dollar have helped boost prices for
    crude oil futures,
    which are more widely traded than gasoline
    futures, analysts said. Crude reached a record $111.80 a barrel in
    intra-day trading yesterday, and is now trading near $107.

                          Oil Economics Destroyed

         “Financial flows have created such a destruction of oil
    ,” the PetroMatix report said.
         The Nymex crude oil contract for April delivery will expire
    tomorrow. The phenomenon of negative gasoline cracks may persist in
    other contracts, analysts said.
         “The fall of the gasoline crack is severe as well in other
    months and if further buying comes into crude oil on the back of
    the dollar, the risk remains for gasoline to fall below crude oil
    also in forward contracts,” PetroMatrix said.
         Rising inventories and expectations of waning demand are also
    weighing on gasoline prices and refining margins
    , analysts said.
         “Gasoline weakness can be found in feeble demand,”
    particularly in Organization for Economic Cooperation and
    Development countries, “where consumers are feeling the impact of
    rising energy prices,” Vienna-based consultants JBC Energy GmbH
    said in a note to clients today.

    –With reporting by Alexander Kwiatkowski in London. Editors:
    Stephen Voss, Stephen Cunningham

    To contact the reporter on this story:
    Nidaa Bakhsh in London at +44-20-7673-2229 or

    To contact the editor responsible for this story:
    Steve Voss at +44-20-7673-3520 or


  • #6975

    Charles Randall

     Here are two recent news items highlighting a repeated theme of mine (and John Crudele evidently) that speculators not the market fundamentals have been cause of both oil & gasoline prices. Greed has finally driven them over the line into exposure and destruction of oil/refining industry economics (ie Crude more than Gasoline & negative cracked spreads).
    Maybe some folks will finally get off duffs and take action.  I would suggest oil companies cross check their own Crude Oil Trading groups to make sure the hedges have been linked to physical barrels and not just speculation……although the profits are going to tell that story themselves in shortly. 
     Change might come true sooner if lot refiners only bought their crude physical barrels at a value justified on fundamentals (lot lower than $10 lower the news items are suggesting) and not at a WTI “hedge protected” trading value. Since most US refineries actually use heavy crude oils deeply discounted from sweet crude index’s like WTI – it may be time to fast forward a true Sour Crude index that isn’t a delta or discount off WTI value that has no relation to the traded/exported/transported import crude they actually use.

  • #6939

    Charles Randall

    <Here is recent Bloomberg news example of illegal trading that is just tip iceberg – these were obvious & clumsy versions (unfortunately they were on Energy side) of what original article was pointing too – CER>
    Seven Charged in NYMEX Illegal Trading Probe, Prosecutors Say
    2008-04-08 12:50 (New York)
    By Karen Freifeld
         April 8, 2008 (Bloomberg) — Seven men were charged in a joint
    probe by New York prosecutors and the Commodity Futures Trading
    Commission into an alleged front-running scam involving evidence
    tampering and bribery at the New York Mercantile Exchange
         Steven Karvellas, a former NYMEX director, pleaded guilty
    today to securities fraud as part of the scheme to profit from
    trades of customer natural gas contracts. Six other men — five
    former floor clerks and another NYMEX employee — were previously
    charged in the case,
    Manhattan District Attorney Robert
    Morgenthau said today in a statement.
         Karvellas used the purchase and sale of the contracts
    between September 2002 and May 2003 to trade for himself,
    according to a March 26 plea agreement. He agreed at a hearing
    today in New York State Supreme Court in Manhattan to serve five
    months in prison, five years probation and pay $850,000.
         Karvellas would decide to trade for himself “by delaying
    the allocation of customer orders to see what direction the
    market was moving,
    ” according to the agreement. “When the
    market price made the order profitable, he would then allocate
    the contracts to himself.”
         An independent broker who joined the exchange in 1990 and
    became a board member in 1996, Karvellas was a director at NYMEX
    from 1996 to 2006, according to company filings
         Three others have pleaded guilty in the case, Morgenthau
    said in a statement. They are Thomas Maloney, a former floor
    broker for Maloney Trading; Brian Keane, a former floor clerk for
    Power Futures Trading Inc.; and Ryan Tremblay, a former floor
    clerk for several companies, Morgenthau said.
         They have all pleaded guilty to trading ahead of customer
    orders, according to the statement. Maloney will be sentenced to
    probation and a $75,000 fine; Keane is to be sentenced to four
    months in jail; and Tremblay is to be sentenced to probation,
    prosecutors said.
         Two other former floor clerks were arrested on similar
    , Morgenthau said. They include John Kozlik, a clerk for
    Maloney Trading, and Al Demicoli, a clerk for New York Energy and
    Metals Executions Inc. A former MYMEX employee, Alvin Perez, was
    arrested for commercial bribe receiving, according to the
    statement. He was charged with accepting cash or gifts from floor
    brokers in exchange for sharing information about internal NYMEX
    investigations into broker trading practices.

                            Evidence Tampering

         Morgenthau said that, when Karvellas became aware of the
    investigation into trading practices and that records had been
    subpoenaed by a grand jury, he ordered a subordinate to destroy
    trading records that would have exposed his practices.
         Karvellas began his career as a clerk at the Commodity
    Exchange in 1984 and was elected to the board of governors in
    1987, according to a 2001 proxy filing. He served on the
    executive committee from 1998 to 2002, according to a 2005
    statement from NYMEX.
         He also served as chairman of the adjudication, compliance
    review and natural gas advisory committees, and as vice chairman
    of the floor broker advisory committee.
         “He violated his obligation to faithfully execute his
    customers’ orders and he stole trading profits that rightfully
    belonged to his customers,” according to the plea deal.
         Defense lawyer John Siffert declined to comment. Sentencing
    was scheduled for Sept. 9.
         The case is People v. Karvellas, 08-01511, New York State
    Supreme Court (Manhattan).

    –With reporting by Matthew Leising in New York. Editors: David
    Rovella, Otis Bilodeau

  • #6836

    Charles Randall

    <Here is updates on continued proof  Wallstreet …not oil companies are to blame for high crude & product prices because of over-speculation. Hopefully enough will get creamed on wrong-way bets that lose money. Unfortunately oil companies are not taking leadership (unlike in food industry strong push against Ethanol problems) & did not let present this issue forcefully or call for Congress act on Wallstreet at hearing this week – instead they opted for drilling rights & tax avoidance issues ….. neither are likely with liberal factions of congress in control. – CER comments>

    Blame Wall Street for $135 Oil on Wrong-Way Betting (Update1)
    2008-05-21 22:33 (New York)

    By Alexander Kwiatkowski and Grant Smith
         May 22, 2008 (Bloomberg) — Oil’s rally to a record above $135 a
    barrel came as traders bought crude to cover wrong-way bets that
    prices would decline, according to data
    from the New York
    Mercantile Exchange.
         The number of outstanding futures contracts, known as open
    interest, fell 8.1 percent in a week to 1.36 million at the same
    time that prices rose 2.6 percent, the data show. Falling open
    interest and rising prices are signs that traders are buying to
    exit so-called short positions that would profit if oil fell, and
    lose money as they rose.
         “In a market like today, which is trending higher while
    open interest is falling, it’s a sign that money is moving out of
    the market,” said Stephen Schork, president of Schork Group Inc.
    in Villanova, Pennsylvania. Open interest in Nymex crude
    futures peaked this year at 1.5 million on March 13.
         Crude futures yesterday gained 3.3 percent to $133.17 a
    barrel for July delivery, the largest advance since May 2 on the
    Nymex, and touched a record $135.04 today. Oil rose after a
    government report showed U.S. inventories unexpectedly declined
    last week. Oil has more than doubled in the past year.
         Open interest has been sliding for months, after the number
    of outstanding crude futures reached a record 1.58 million on
    July 16, 2007.
         “It is not a growing market, it is a shrinking market in
    terms of open interest,” said Olivier Jakob, managing director
    of Petromatrix Gmbh in Zug, Swizterland. “It is also
    facilitating the move upward.”

                             Shell’s View

         Oil prices have closed at record highs on 27 days so far
    this year, prompting OPEC oil ministers including Saudi Arabia’s
    Ali al-Naimi to declare that the rally is led by investors,
    rather than a shortage of supply.
         Crude for delivery in December 2016 ended yesterday at
    $142.09 a barrel, signaling investors anticipate prices will
    gain for years. Some traders speculate oil will reach $200 this
    year. The price of a December 2008 option contract that allows
    the holder to buy 1,000 barrels of crude at $200 each jumped 67
    percent in three days to $1.72 a barrel yesterday on the Nymex.
         U.S. oil executives told Congress yesterday that prices
    should be between $35 and $90 a barrel. John Hofmeister,
    president of Shell Oil Co.
    the Houston-based subsidiary of
    Royal Dutch Shell Plc, pegged the proper range “somewhere
    between $35 and $65 a barrel.”
         Saudi minister al-Naimi said in March when oil was trading
    near $100 that prices were unlikely to fall below $60 or $70,
    representing the cost of producing alternatives such as biofuels
    or tar sands.
         Biofuels such as ethanol are the only alternative to crude
    oil, Sun Microsystems Inc. co-founder Vinod Khosla said in an
    interview on Bloomberg Radio yesterday.
         “The only realistic option that we have, and there is none
    other, is to use biofuels,” said Khosla, an investor in ethanol
    makers. “There is only one choice.”

    To contact the reporters on this story:
    Alexander Kwiatkowski in London at +44-20-7330-7450 or
    Grant Smith in London at +44-20-7330-7353 or

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