Manipulation of Oil Market
Can oil markets be manipulated after knowing the process of determination of oil prices? This is the question which is being asked by traders who have observed unusual trends in the oil market – like the price of oil falling to zero and continuing to fall further. This was unprecedented in the history of the oil market and, as a result, investors who had taken long positions on oil found their losses increasing at an exponential rate. So, how does this manipulation take place and who are the major players in this area? Let’s find out more in this regard.
Activities pertaining to Oil Market Manipulation
As an example, a trader may be scheduled to purchase tens of thousands of metric tons of fuel, with the price tagged to the daily benchmark provided by S&P Global Platts. In order to save money, the trader would offer to sell small amounts of crude at a price lower than the current spot, or at a loss. The key factor that actually makes the trader money is that oil traders are not required to report their purchases and sales of crude – the process is voluntary. Platts bases its benchmark price based off of the information that traders voluntarily provide. Hence, when a trader reports a sale of the commodity below the current spot price, Platts takes this into account and lowers the spot price.
Next, the trader is able to make his purchase of fuel at a small discount, only a few dollars per ton, but the savings compound quickly. For instance, the trader is scheduled to purchase 100,000 metric tons next week at a price of $100 per ton (the current spot price). This week, the trader will sell some of his crude assets for $95 and report the sale to Platts. Platts will then take the trade into account and lower the spot price to $98 per ton. Then, the trader makes his purchase of 100,000 tons, effectively saving $200,000 on the purchase as the spot price is now artificially $2/ton lower.
Mitigation and Controls around Market Manipulation
With such a seemingly well-known scheme plaguing markets, it is tough to imagine how it can possibly still go on. Traders engaged in practices such as those described above do not view their actions as illegal because they did not involve “colluding with competitors, reporting fake prices or other obviously forbidden behavior.” And it would seem that from a legal standpoint, these traders are mostly correct.
Proving market manipulation requires a legal team to show clear intent to mislead markets in order to make a financial gain. Definitive proof of a person or institution’s intent has long been the snag in the legal proceedings for prosecutors. Within the confines of trading, proving intent is often too difficult, allowing many would-be market manipulators off the hook. However, the European Union and Platts have stated that they will be looking into the matter in an effort to make oil markets more efficient and safer for all traders.
Conclusion
The role of regulators and regulatory bodies in oil market manipulation is likely to grow in the coming days. The Commodities and Futures Commission (CFTC) has already received a number of complaints and claims in this regard and they have been involved in analyzing crude oil price aberrations to identify cases of market misconduct and the evidence supporting the same. As rogue traders or other individuals employ increasingly sophisticated manipulation methods, the security of the oil and gas market and related industries like steel fabrication needs to be equally robust – so that oil prices are subject to supply and demand and market sentiment factors and nothing else!
