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     May 6, 2008
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Speculators knock OPEC off oil-price perch
By F William Engdahl

The price of crude oil today is not made according to any traditional relation of supply to demand. It is controlled by an elaborate financial market system as well as by the four major Anglo-American oil companies. As much as 60% of today's crude oil price is pure speculation driven by large trader banks and hedge funds. It has nothing to do with the convenient myths of Peak Oil. It has to do with control of oil and its price. How?

First, the role of the international oil exchanges in London and New York is crucial to the game. Nymex in New York and the Intercontinental Exchange (ICE) Futures in London today control global benchmark oil prices which in turn set most of the freely traded oil cargo. They do so via oil futures contracts on two


grades of crude oil - West Texas Intermediate and North Sea Brent.

A third rather new oil exchange, the Dubai Mercantile Exchange (DME), trading Dubai crude, is more or less a daughter of Nymex, with Nymex president James Newsome sitting on the board of DME and most key personnel British or American citizens.

Brent is used in spot and long-term contracts to value much of crude oil produced in global oil markets each day. The Brent price is published by a private oil industry publication, Platt's. Major oil producers including Russia and Nigeria use Brent as a benchmark for pricing the crude they produce. Brent is a key crude blend for the European market and, to some extent, for Asia.

West Texas Intermediate (WTI) has historically been more of a US crude oil basket. Not only is it used as the basis for US-traded oil futures, but it is also a key benchmark for US production.

The tail that wags the dog
All this is well and official. But how today's oil prices are really determined is done by a process so opaque only a handful of major oil trading banks, such as Goldman Sachs or Morgan Stanley, have any idea who is buying and who is selling oil futures or derivative contracts that set physical oil prices in this strange new world of "paper oil".

With the development of unregulated international derivatives trading in oil futures over the past decade or more, the way has opened for the present speculative bubble in oil prices.

Since the advent of oil futures trading and the two major London and New York oil futures contracts, control of oil prices has left the Organization of the Petroleum Exporting Countries (OPEC) and gone to Wall Street. It is a classic case of the "tail that wags the dog".

A June 2006 US Senate Permanent Subcommittee on Investigations report on "The Role of Market Speculation in rising oil and gas prices" noted, "... there is substantial evidence supporting the conclusion that the large amount of speculation in the current market has significantly increased prices".

What the senate committee staff documented in the report was a gaping loophole in US government regulation of oil derivatives trading so huge a herd of elephants could walk through it. That seems precisely what they have been doing in ramping oil prices through the roof in recent months.

The senate report was ignored in the media and in the Congress. The report pointed out that the Commodity Futures Trading Trading Commission, a financial futures regulator, had been mandated by Congress to ensure that prices on the futures market reflect the laws of supply and demand rather than manipulative practices or excessive speculation. The US Commodity Exchange Act (CEA) states:
Excessive speculation in any commodity under contracts of sale of such commodity for future delivery ... causing sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity, is an undue and unnecessary burden on interstate commerce in such commodity.
Further, the CEA directs the CFTC to establish such trading limits "as the commission finds are necessary to diminish, eliminate, or prevent such burden". Where is the CFTC now that we need such limits? It seems to have deliberately walked away from its mandated oversight responsibilities in the world's most important traded commodity, oil. As that US Senate report noted:
Until recently, US energy futures were traded exclusively on regulated exchanges within the United States, like the NYMEX, which are subject to extensive oversight by the CFTC, including ongoing monitoring to detect and prevent price manipulation or fraud. In recent years, however, there has been a tremendous growth in the trading of contracts that look and are structured just like futures contracts, but which are traded on unregulated OTC [over the counter] electronic markets. Because of their similarity to futures contracts they are often called "futures look-alikes".
The only practical difference between futures look-alike contracts and futures contracts is that the look-alikes are traded in unregulated markets whereas futures are traded on regulated exchanges. The trading of energy commodities by large firms on OTC electronic exchanges was exempted from CFTC oversight by a provision inserted at the behest of Enron and other large energy traders into the Commodity Futures Modernization Act of 2000 in the waning hours of the 106th Congress.

The impact on market oversight has been substantial. NYMEX traders, for example, are required to keep records of all trades and report large trades to the CFTC. These Large Trader Reports, together with daily trading data providing price and volume information, are the CFTC's primary tools to gauge the extent of speculation in the markets and to detect, prevent and prosecute price manipulation. CFTC chairman Reuben Jeffrey recently stated: "The commission's Large Trader information system is one of the cornerstones of our surveillance program and enables detection of concentrated and coordinated positions that might be used by one or more traders to attempt manipulation."

In contrast to trades conducted on the NYMEX, traders on unregulated OTC electronic exchanges are not required to keep records or file Large Trader Reports with the CFTC, and these trades are exempt from routine CFTC oversight. In contrast to trades conducted on regulated futures exchanges, there is no limit on the number of contracts a speculator may hold on an unregulated OTC electronic exchange, no monitoring of trading by the exchange itself, and no reporting of the amount of outstanding contracts ("open interest") at the end of each day.

Then, apparently to make sure the way was opened really wide to potential market oil price manipulation, in January 2006, the George W Bush administration's CFTC permitted the ICE, the leading operator of electronic energy exchanges, to use its trading terminals in the United States for the trading of US crude oil futures on the ICE futures exchange in London - called "ICE Futures".

Previously, the ICE Futures exchange in London had traded only in European energy commodities - Brent crude oil and United Kingdom natural gas. As a United Kingdom futures market, the ICE Futures exchange is regulated solely by the UK Financial Services Authority. In 1999, the London exchange obtained the CFTC's permission to install computer terminals in the United States to permit traders in New York and other US cities to trade European energy commodities through the ICE exchange.

The CFTC opens the door
Then, in January 2006, ICE Futures in London began trading a futures contract for WTI crude oil, a type of crude oil that is produced and delivered in the United States. ICE Futures also notified the CFTC that it would be permitting traders in the United

Continued 1 2 

Bad oil news here to stay (Mar 13, '08)

The unequal impact of war (Mar 12, '08) 

The door to Iraq's oil opens (Feb 16, '08)

1. How under-the-gun Iran plays it cool

2. Iran moving into the big league

3. Abandoning USS Titanic

4. Taliban claim victory from a defeat

5. China runs at its own pace

6. Bernanke takes one more gamble

7. BOOK REVIEW: America's university of imperialism

8. Funny numbers are no joke

(May 2-4, 2008)



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