On Tuesday, federal commodities regulators filed a civil lawsuit against two obscure traders in Australia and California and three American and international firms. The suit says that in early 2008 they tried to hoard nearly two-thirds of the available supply of a crucial American market for crude oil, then abruptly dumped it and improperly pocketed $50 million.
The commodities agency says the case involves a complex scheme that relied on the close relationship between physical oil prices and the prices of financial futures, which move in parallel.
In a matter of a few weeks in January 2008, the defendants built up large positions in the oil futures market on exchanges in New York and London, according to the suit, filed in the Federal Court in the Southern District of New York.
At the same time, they bought millions of barrels of physical crude oil at Cushing, Okla., one of the main delivery sites for West Texas Intermediate, the benchmark for American oil, the suit says. They bought the oil even though they had no commercial need for it, giving the market the impression of a shortage, the complaint says.
At one point they had such a dominant position that they owned about 4.6 million barrels of crude oil, estimating that this represented two-thirds of the seven million barrels of excess oil then available at Cushing, according to lawsuits.
This type of oil is also the main driver of prices of the futures contracts, and their actions caused futures prices to rise, the authorities say. “They wanted to lull market participants into believing that supply would remain tight, the agency said. They knew that as long as the market believed that supply was tight and getting even tighter, there would be upward pressure on the prices of W.T.I. for February delivery relative to March delivery, which was their goal.
The traders in mid-January cashed out their futures position, and then a few days later began to bet on a decline in oil futures, with Mr. Wildgoose remarking in an e-mail about the “inevitable puking” of their position on an unsuspecting market, the federal lawsuit says.
In one day, Jan. 25, they then dumped most of their holdings of West Texas Intermediate oil, and profited by the drop in futures.
The traders repeated the buying and selling in March 2008, and were preparing to do it again in April but stopped when investigators contacted them for information, the suit says.
In the last few years, the commission has settled a handful of cases of manipulation in the natural gas market. In 2007, it settled charges for $1 million against the Marathon Petroleum Company for trying to manipulate West Texas Intermediate crude oil in 2003.
The agency brought an action similar to its latest case in 2008, asserting that Optiver Holding, a proprietary trading fund based in the Netherlands with a Chicago affiliate, used a trading program in 2007 to issue rapid-fire orders to manipulate the crude oil market. That case, which is pending, involved allegations of manipulation of futures contracts for light sweet crude, New York Harbor heating oil and New York Harbor gasoline. Read more…