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Data show oil speculators' pricing sway

August 21, 2008|David Cho | The Washington Post

WASHINGTON — Regulators had long classified a private Swiss energy conglomerate called Vitol as a trader that primarily helped industrial firms that needed oil to run their businesses.

But when the Commodity Futures Trading Commission examined Vitol's books last month, it found that the firm was in fact more of a speculator, holding oil contracts as a profit-making investment rather than a means of lining up the actual delivery of fuel. Even more surprising was the massive size of Vitol's portfolio -- at one point in July, the firm held 11% of all the oil contracts on the regulated New York Mercantile Exchange.

The discovery revealed how an individual financial player had gained enormous sway over the oil market without the knowledge of regulators. Other CFTC data showed that a significant amount of trading activity was concentrated in the hands of just a few speculators.

The CFTC, which learned about the nature of Vitol's activities only after making an unusual request for data from the firm, now reports that financial firms speculating for their clients or for themselves account for about 81% of the oil contracts on the Nymex.

Some lawmakers have blamed those firms for the volatility of oil prices, including the tremendous run-up that peaked earlier in the summer.

"It is now evident that speculators in the energy futures markets play a much larger role than previously thought, and it is now even harder to accept the agency's laughable assertion that excessive speculation has not contributed to rising energy prices," said Rep. John D. Dingell (D-Mich.). He added that it was "difficult to comprehend how the CFTC would allow a trader" to acquire such a large oil inventory "and not scrutinize this position any sooner."

The CFTC did not publicly identify Vitol. The agency's report showed only the size of the holdings of an unnamed trader. Vitol's identity as that trader was confirmed by two industry sources with direct knowledge of the matter.

CFTC documents show Vitol was one of the most active traders of oil on the Nymex as prices reached record levels. By June 6, for instance, Vitol had acquired a huge holding in oil contracts, betting prices would rise. The contracts were equal to 57.7 million barrels of oil -- about three times the amount the United States consumes daily. That day, the price of oil soared $11 to settle at $138.54. Oil prices eventually peaked at $147.27 a barrel July 11; crude closed at $114.98 on Wednesday.

The documents do not say how much Vitol put down to acquire this position, but under Nymex rules, the down payment could have been as little as $1 billion, with the company borrowing the rest.

The biggest players on the commodity exchanges often operate as "swap dealers" that primarily invest on behalf of hedge funds, wealthy individuals and pension funds.

To build up the vast holdings this practice entails, some swap dealers have maneuvered behind the scenes, exploiting their political influence and gaps in oversight to gain exemptions from regulatory limits and permission to set up new, unregulated markets. Many big traders are active not only on the Nymex but also on private and overseas markets beyond the CFTC's purview.

Using swap dealers as intermediaries, investment funds have poured into the commodity markets, raising their holdings to $260 billion this year from $13 billion in 2003. During that same period, the price of crude oil rose unabated.

Data from the CFTC show that at the end of July, just four swap dealers held one-third of all Nymex oil contracts that bet prices would increase. Energy analysts say the data are evidence of the concentration of power in the markets.

CFTC leaders have contended that speculators are not influencing commodity prices. If any new information arises during the agency's examination of swap dealer activity, officials said they would report it to Congress.

Victoria Dix, a spokeswoman for Vitol, declined to answer questions. The firm, through Dix, said only that it had not been contacted by the CFTC about the reclassification of its business and that its trading status remained unchanged.

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