Are Oil Prices Rigged?

You know that part of the intellectual basis for The Gas Game is to use energy prices on future markets to approximate wholesale prices and then try to predict what is going to happen to retail prices. Following the futures markets have always made me wonder if they are manipulated, or perhaps the better word is abused.  The abuse is that traders buy and sell futures contracts — paper gasoline — but have no interest in real gasoline.  When the contracts come due, they “roll them over” to another month, rather than deliver the gasoline or take delivery.  Some of this is OK with me — I’ve played the stock market a bit — but I’ve read articles that suggests that this speculation has distorted those markets.

A few weeks ago, I read this article in Time magazine that makes that case that it is quite possible that those markets are distorted, because there really isn’t a lot of money being exchanged on NYMEX.  Key quote:  “The point is, it would only take about $9 billion to control the entire long position in oil. That sounds like an enormous amount of money, but some of the major individual players in oil are bigger than the market itself: Sultan Hassanal Bolkiah Muizzaddin, of Brunei Shell Petroleum, is worth about $23 billion; Saudi Prince Alwaleed Bin Talal Alsaud is worth about $21 billion; Russian Vagit Alekperov of LUKoil is worth about $13 billion. No, we’re not implicating any of these guys in market rigging; in fact the list of billionaires with that kind of swag is long. The point is that anyone in that category could clearly handle the risks of the oil  futures market, and they might even be willing to take delivery on oil.”

Given that the U.S. government is throwing $700 billion around this weekend (and that’s a whole different story), $9 billion just seems like a rounding error.


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  1. Yes the futures markets in oil,gas and other commoditys are being manipulated. A recent study done by Masters capital management demonstrates the markets are being controlled by big money speculators. George Soros alsotestified before congress telling them the same thing. On Sept. 18,2008 the U.S. House of representatives passed hr6604(a bill to revise the futures contract rules to make it harder for speculation to run wild). Don’t hold your breath waiting for it be signed into law though. Bush will no doubt veto it if it reaches his desk!

  2. I absolutely think that the speculators are causing prices to artificially inflate. I’ve been told from the oil company that we buy from that crude would be around $60 – $75 without speculators.

    It’s not just wealthy individuals that can be the problem. Big firms like Morgan Stanley, JP Morgan, and Deutsche Bank are huge speculators.

    The futures market has went a long way past being based on actual supply and demand to determine a fair price. These “paper traders” don’t care what price the oil companies end up paying, they just want the price to go up so that they can make a quick profit.

    The bill that the house passed is a good step toward what needs to be done. But, I would like to see them go one more step and ban anyone from trading in the market if they don’t have a storage facility capable of receiving the oil.

  3. Well, if you need any proof that speculators are manipulating the market, just look at what happened today. He is a good article on it:

    So, now we will most likely get a 10+ cent increase in wholesale prices because the traders were running out of time to make a profit on their contracts…

    I guess that they aren’t too intimidated by that bill going through Congress.

  4. Oh look, the futures prices are coming back down. I’m sure that it has nothing to do with speculators trying to buy at a lower price to make a profit for this month too.

    Rack prices “only” went up 2 cents last night for gas, but diesel went up 12.

    I hate to say this, but our break even cost is $3.609. So, Speedway’s Flint station is 16 cents below cost and their Grayling station is 53 cents above.

    There is a slight chance that Speedway will move their lower priced stations up to $3.799. It looks like about half of their stations are at or below that.

    I forgot to mention earlier that Goldman Sachs is the other big speculator company.

  5. Now explain to me why prices in Kalamazoo/Portage are much lower than around Grand Rapids. Currently at $371/gal for Regular Unleaded.

  6. We had a $0.10 price drop on gas and diesel in Grand Haven today!

  7. Rudy: it all comes down to competition. If 1 station drops their price, then everyone else is going to follow them. If the stations that normally pull the price down drag their feet, then other people will take the opportunity to make money while they can instead of dropping below them.

    It’s hard for people to understand that the gas stations normally average a 10-15 cent markup over what they paid for the gas. Our wholesale prices have been all over the place in the last couple weeks. They went up almost 60 cents in 3 days, then later they went down almost 50 cents in 2 days. Last week they went down 10 cents one day and up 10 the next, yesterday it went up 2 and today is down 12 (the market looks like we will be up 5 or so for tomorrow). It is not unlikely that 2 stations across the street from each other could’ve had 30+ difference in cost a week ago.

    So, it has been absolutely impossible to keep track of our inventory cost. What you are seeing right now is that some stations are blindly looking at what they can buy gas for today and dropping their price, and others are nervous about possibly losing money for the month and slowly dropping. Our average profit margins for the month could be anywhere between -10 and +30 depending on the timing of deliveries. Anything less than a 10 cent markup is not good for most of us.

    Is Kalamazoo too cheap? Is Grand Rapids too expensive? The answer is yes and no to both. Some stations in Kzoo will lose money for the month and some will have a normal margin. Some stations in GR will have a normal margin and some will make a lot more than normal.

    If we actually have a week with stable wholesale prices, then it will make the retail margins get back to normal.

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