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Leonard Brecken

Leonard Brecken

Leonard is a former portfolio manager and principal at Brecken Capital LLC, a hedge fund focused on domestic equities. You can reach Leonard on Twitter.

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Price Manipulation In The Oil Markets?

According to Reuters, Arcadia Petroleum Ltd, and its Parnon Energy unit have settled a $16.5 million civil suit filed against them for manipulating futures prices. This comes after a prior settlement with the US Commodities Futures Trading Commission whereby both entities were banned for trading futures for three years. Whether they admitted wrong doing is unclear but the case provides more evidence that the supposed “free” capital markets in the US are far from free.

Arcadia was accused of artificially creating a shortage at Cushing, OK, then using futures and options to manipulate prices as they spiked in the summer of 2008 before subsequently crashing, along with equity markets, in time for the fall 2008 elections. The parties involved took huge long positions to drive up prices, then dumped them for a big profit. Then they took short positions to drive prices back down. Related: Forget The Noise: Oil Prices Won’t Crash Again

This comes on top of cases in which banks were caught manipulating LIBOR (London InterBank Offered Rate) and Foreign Exchange rates as well as the ongoing probes on gold price manipulation. In all of these cases fines were issued but serious jail time, as far as we know, wasn’t.

Price manipulation is running rampant and it seems that instead of regulators issuing stiffer jail sentences to deter it, slaps on the wrist via fines are becoming more and more common. I went on record saying that the crash in oil last fall from the $70s was driven mostly by media hysteria either of their own invention or fed (no pun intended) to them by parties who stood to benefit from the fall of oil.

In the past week or two, we have witnessed a renewed hysteria by that same media, focusing on oil supply and ignoring the demand side of the equation completely. For example, article after article has been written on OPEC increasing supply but no one except OPEC itself cites the fact that demand is rising, justifying the decision to boost output. Bank of America reports that gasoline demand for India, China and Korea rose by 19, 13 and 8 percent respectively, year on year in April, in contrast to cries that demand in Asia was supposed to be weak. In fact gasoline demand overall is at a two year high no less. We won’t rehash thoughts on both the EIA & IEA here again. Related: Expect The Recent Oil Rally To End Badly If OPEC Doesn’t Cut

This has, once again, occurred (just like it did last summer) when there exists ample evidence that the US economy is slowing dramatically. Oil is used as a weapon and a tool for politics, war and managing the economy. It does not surprise me at all then that huge price moves keep occurring at key times, as liquidity in all markets shifts from investors to either central banks or banks in general.

The question is then: when is enough enough? And when does it ultimately damage the faith in “free” trading in all assets among investors? I believe it already has in part, as volume across most asset classes has been declining reflecting a loss in investor confidence. Related: This Nation Is Poised For A Massive Refining Boom

In addition, unlike equities, whose underlying companies are only indirectly affected by price swings in their stocks and in energy prices, energy companies are directly affected. They should be especially concerned, when most not only derive their revenues from the “free” markets but also use them to hedge with banks that may themselves have a hand in setting prices. Whether manipulation is occurring now in energy prices is debatable but energy companies should be aware, as where there is smoke, there is fire. Further, as I said earlier, it’s not like it hasn’t already been well documented in other asset classes.

By Leonard Brecken of Oilprice.com

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