Streetwise Professor

February 24, 2012

Again With the Speculators

Filed under: Commodities,Derivatives,Economics,Energy,Politics,Regulation — The Professor @ 10:46 am

For years I have been saying and writing that every spike in energy prices results in a replay of the final scene from Casablanca: “Round up the usual suspects,” with speculators being at the front of the line.   No exception now. With rising gas prices being the main threat to his reelection prospects, Obama and other Democrats are doing their best Captain Renault imitation.  Obama:

Obama sought to deflect growing Republican attacks over rising prices at the pump, blaming recent increases on a mix of factors beyond his control, including tensions with Iran, hot demand from China, India and other emerging economies, and Wall Street speculators taking advantage of the uncertainty.

Noted energy expert, Nancy-natural-gas-is-not-a-fossil-fuel-Pelosi also chimed in:

“Wall Street profiteering, not oil shortages, is the cause of the price spike,” Pelosi said in a statement. “Unfortunately, Republicans have chosen to protect the interests of Wall Street speculators and oil companies instead of the interests of working Americans by obstructing the agencies with the responsibility of enforcing consumer protection laws.”

And, again at the risk of sounding like a broken record (responding to a vast collection of broken records): no theory, no evidence.

With respect to evidence, a heads up: The opponents of the “financialization” of commodity markets have flogged the Singleton paper on oil index trading for all it is worth. I am putting the finishing touches on a far more extensive study, the conclusion of which is quite simple: the Singleton results do not stand up in a broad sample of commodities, or even in oil for a longer sample period.  Watch this space.

In other words: try again, guys.  But that would actually presume, I guess, that evidence matters to these people, anyways.

One thing struck me about the Obama and Pelosi statements: the deliberate inclusion of “Wall Street” in their formulation, as in “Wall Street speculators.”  What, London, Geneva, and Singapore don’t rate?

Which brings another movie image to mind: the scene in Frankenstein in which the villagers storm the castle.  Obama and Pelosi are just following the #OWS-themed, Valerie Jarret-inspired class warfare campaign script. Be prepared to be bombarded with similar rhetoric for the next eight months.  And the shrillness of the attacks will vary directly and exponentially with the price of gasoline.

I don’t have a lot more to say on the subject, primarily because there’s not a lot new to say.  Obama and Pelosi are being good greens, and recycling well-used rhetoric.

I was interviewed on the subject Tuesday for an NPR piece.  It does a pretty good job of summarizing what I said in a 20 minute interview.  A few brief comments:

  1. The CFTC claims that it has brought numerous energy enforcement actions and collected large fines.  This is highly disingenuous.  Highly.  These have not been in the oil market (except for the Arcadia case which I criticize in the piece, echoing what I’ve written on SWP).  They have not shown any connection between speculation and manipulation and high oil prices. Virtually all of these cases relate to price reporting fraud and wash trading in the natural gas markets during the merchant energy boom, prior to the demise of Enron and the merchant energy meltdown in 2002.  I was highly involved in efforts designed to prevent these abuses from recurring.  Efforts that did not come to fruition, but which focused on a solution (the creation of transaction data hubs with mandatory reporting) that has now been adopted for the derivatives markets worldwide-not just natural gas in the US.  That is arguably one of the only sensible things in Frankendodd.
  2. The piece mentions John Arnold making a billion in speculating.  Yes, he did.  In gas.  The price of natural gas is at near-historic lows, demonstrating that speculative activity does not inevitably cause prices to be high.  Indeed, the disconnect between natural gas prices and oil prices is a huge embarrassment to the anti-speculation mob, especially those who claim that index investing (which results in highly correlated trades in oil and gas) is a dominant force in driving commodity prices.
  3. It drives me to distraction that “speculation” and “manipulation” are used interchangeably.  No. No. No.
  4. Manipulation definitely occurs in commodity markets, including the energy markets: for instance, manipulations were common in the Brent market in the late-90s and early-00s, and may become more common again as BFOE production continues to diminish.   These manipulations lead to highly temporary and localized price distortions.   Most of the Brent squeezes resulted in elevations in Brent prices for days, or a few weeks, and didn’t push up prices of other types of oil: indeed, the main symptom of these squeezes was the rise in Brent relative to other grades and locations.  As another example, the BP propane squeeze (a case I was involved in) resulted in a spike in TET propane prices for about two weeks.  They don’t explain persistent, global prices spikes.

Hopefully I will have the results on the expanded Singleton analysis available within a few weeks.  Until then, get prepared for a continued onslaught against “Wall Street profiteers and speculators.”  La plus ca change . . .

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  1. I looked at the relationship between crude oil and natural gas prices in this post last week: Graph of price ratio is stunning in and of itself and as you indicate, a major inconvenient fact for the anti-speculation crowd.

    Comment by Scott Irwin — February 24, 2012 @ 1:04 pm

  2. In your list of idiocies on recent oil market happenings, please inlude the moronicities issued nightly by Bill O’Reilly; more people might be listening to him than pay attention to either the president or Pelosi.

    Comment by GlibFighter — February 24, 2012 @ 1:28 pm

  3. Pelosi assumes (without giving it much thought) that speculation is manipulation. Further she thinks that manipulating prices is easier to do and harder to detect than history indicates. Thus, you speculate thereby manipulating prices and somehow profit. If you could get Nancy to think about how one would manipulate these gigantic markets you would be on your way to having a real discussion. I don’t think she really cares.

    Comment by David Hoopes — February 24, 2012 @ 2:20 pm

  4. Pelosi assumes without much thought=redundancy 🙂 The next thought she has will be the first.

    The ProfessorComment by The Professor — February 24, 2012 @ 7:16 pm

  5. I might take you up on that GlibFighter.

    The ProfessorComment by The Professor — February 24, 2012 @ 7:17 pm

  6. Pelosi and company are making the usual modified George Washington defense: ” I cannot tell a lie, they did it!” The entire nature of this “debate” is to cover their asses and focus on the EEEEVIL Republi-TeaParteans, Martians or whoever else comes to mind (BTW, we have to come up for another term than debate or sound bite for this sort of drivel, no matter the party: Verbal Flatulence? Guttural Gasses?, Polifarts? Rhetoriturds?- help us here Prof!). It would be interesting to see if housing prices rise due to EEEVIL speculators buying; would that be bad? Of course not – just the effects of wise and intelligent policies and management by the O!

    The silence of the media when something is wrong and can be blamed on the Dems is no longer stunning, but is par for the course. The standard line for the next at least 9 months is when anything goes wrong is to:

    Ignore it until it is too obvious not to comment.
    Blame it on evil somebodies while,
    Playing helpless.

    It is interesting that claiming helplessness, while blaming others is never seen as a contradiction in terms is the Pres is helpless, how come the “evil other” is not helpless?

    It is going to be a long time till November.

    Comment by sotos — February 25, 2012 @ 1:01 pm

  7. You are probably too young to remember the legendary squeezes of the 1980s — Phibro’s and J. Aron’s Brent squeezes were the stuff of many a “gather ’round mates, I’ve got a no-sh*tter for you …”

    Squeezing the Brent market used to be a sure thing until the guys with the oil in inventory (the Majors) got tired of the traders messin’ with their market and released a tsunami of crude on the market.

    I refer, of course, to the famous crushing of the Transworld Oil squeeze in ’87 (see ) … in particular, note the FT’s punch-line mid-way into this article” “… the market saw several high-profile squeezes in Cushing, the delivery point of the WTI oil benchmark, and the North Sea, home of Brent crude, involving household names of the trading industry. In the most famous, John Deuss, head of then top trading house Transworld, squeezed the Brent crude in 1987 until large producers Shell and Exxon joined forces to flood the market, triggering hefty losses to Mr Deuss.

    “Because the squeezes occurred in the physical market, rather than on closely watched futures exchanges, most did not trigger any sanction. But Tosco, the US-based refiner, sued London-based Arcadia Petroleum in 2000 for $60m in damages for what many consider the last high-profile squeezes of the North Sea’s Brent market. Arcadia settled the case out of court without admitting any wrongdoing.

    “The lawsuit had deep consequences as it prompted changes in the working of the physical market that have made cornerings more difficult on Brent crude.”

    Like Maurice Chevalier, I lean back and exhale, “… Ah, yes, I remember it well.”

    Markets have a way of wrecking a terrible vengeance on bad actors. Kinda like karma.

    Comment by markets.aurelius — February 25, 2012 @ 5:28 pm

  8. @Markets-I’m older than you think, apparently. The ’80s Brent squeezes a little before my time, but the ones in the 90s and early-00s are quite familiar. I remember the Arcadia/Tosco incident very well. I use it as an example in my class. The Senate Permanent Subcommittee on Investigations included a section on “The Vulnerability of the Brent Market to Squeezes” in its 2003 report on the SPR. I spent a lot of time talking to Dan Berkowitz (now General Counsel at the CFTC) helping him understand how those things worked.

    I will look into the Transworld episode more closely. Sounds like Shell & Exxon played the role of latter day P. D. Armours, giving Mr. Deuss a bigger corpse than he cold bury.

    The UK markets generally appear to be the manipulator’s happy hunting ground. Many squeezes on LME. The biggest ones in the softs markets have been in London, not New York.

    The ProfessorComment by The Professor — February 25, 2012 @ 9:33 pm

  9. In 2000 I was an expert for the FTC in the BP-Amoco/ARCO merger case. My piece of the case was related to the effect that the merger would have on the vulnerability of the WTI market to squeezes. Rather contentious deposition b/c my report discussed evidence of squeezes at Cushing in the late-90s. The merger went through after BP agreed to divest the Seaway pipeline (owned by ARCO) in order to reduce its share of pipeline capacity going into Cushing.

    The ProfessorComment by The Professor — February 25, 2012 @ 9:37 pm

  10. But Prof, there IS so much Wall Street speculation in this oil market. I know because Amy Myers Jaffe said so. QED.

    Now let’s open up the SPR!

    Comment by Strigidae — February 26, 2012 @ 1:02 am

  11. @sotos-diarrhea of the mouth, constipation of the brain fits, but a little long. I’ll see what I can come up with!

    The ProfessorComment by The Professor — February 26, 2012 @ 8:10 am

  12. @Strigidae-what was I thinking? Of course, I bow to a higher authority than mine. LOL. Actually, citing AMJ is proof by contradiction 🙂

    The ProfessorComment by The Professor — February 26, 2012 @ 8:11 am

  13. Please correct this spelling:

    “Jon Arnold” should be “John Arnold.”

    Jon C. Arnold is the managing director of the Microsoft Worldwide Utilities Team. There’s another Jon A. Arnold who is an analyst of smart grid and communications issues. Neither are former Enron traders turned billionaires. Only John Arnold is.

    thank you. I am a friend of Jon C. Arnold at Microsoft.

    Comment by Joe Gimenez — March 8, 2012 @ 2:07 pm

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