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Is A Good Old-Fashioned "Market Cornering" Scheme Responsible For The Brent-WTI Divergence?

Tyler Durden's picture





 

In the past several months, energy traders have been scratching their heads over the curious and disturbing divergence between Brent and West Texas Intermediate. At last check the spread between the two was over $6 per barrel. And while some have tried to explain the delta through a fundamental difference in qualities between the two products, the answer may be far simpler, and mirror comparable behaviour seen recently in the "cornering" of various precious and industrial metal markets. As Reuters reports, "oil trader Hetco has taken
control of the first eight North Sea Forties crude oil cargoes
loading in February and two Brent cargoes, giving it significant
influence over the spot market, trade sources said on Tuesday.
Brent and Forties are both part of the BFOE North  Sea
benchmark, which comprises Brent BRT-, Forties FOT-E,
Oseberg OSE-E and Ekofisk EKO-E and acts as a basis for the
settlement  of ICE Brent crude futures LCOc1.
The BFOE benchmark is also used to value millions of barrels
per day of physical crude oil in the Atlantic basin.
" This makes sense: after all what better way to shift the supply/demand equilibrium than to drastically limit supply. And in a market in which demand is increasingly irrelevant (it will pick up... eventually), a real supply shortage may very well lead to accelerating draw downs in inventories, which is the surest way to get crude into the triple digit range.

More from Reuters:

Hetco is an independent trading company partly owned by and backed by U.S. integrated oil and gas company Hess Corp. (HES.N). It has been active in the North Sea oil market for several years, traders said.

Energy and metals market reporting agency Platts, part of publishers McGraw-Hill (MHP.N), which has for decades provided price assessments for North Sea crudes, has changed the basis for its benchmarks several times in an attempt to minimise the potential impact of supply squeezes.

North Sea oil traders described Hetco's acquisition of the February cargoes as the basis for a "trading play" and said that the company had been actively offering February Forties cargoes on Tuesday at prices above the last set of deals.

"If other companies cannot cover their positions, they are going to have to pay up," said one trader at a large U.S.-owned house, who declined to be identified.

How big is the size of this possible manipulation?

Hetco now has control of 30 percent of the Forties and Brent programme for February -- eight of the 25 February Forties cargoes, traders said, as well as two of the eight Brent cargoes loading next month.

Forties cargoes are typically of 600,000 barrels each.

And just how much does it cost one entity to allegedly manipulate the world's crude supply? "At around $98 per barrel, each Forties cargo is now worth
almost $60 million."
Call it $600 million. Pocket change for anyone close enough to the Fed's discount window (or some bank's excess reserves). The IRR? Orders of magnitude higher.

 


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Wed, 01/19/2011 - 19:51 | Link to Comment mynhair
mynhair's picture

No, pipe A doesn't meet pipe B, courtesy of the Libs.

Wed, 01/19/2011 - 20:02 | Link to Comment max2205
max2205's picture

What!? This shit never ends. Hard enough pegging supply and demand but this crap has to end. Where's the Govt. Zzzzzzzz

Wed, 01/19/2011 - 20:12 | Link to Comment NOTW777
NOTW777's picture

"Where's the Govt."

modeling the bad behavior and teaching manipulation

Wed, 01/19/2011 - 20:49 | Link to Comment Pure Evil
Pure Evil's picture

"Where's the Govt."

Regulating how much carbon you can exhale out your nose, and the amount of methane you can blow out your ass.

Wed, 01/19/2011 - 23:01 | Link to Comment loogatee
loogatee's picture

Ten bucks says they'll finagle a way to gain HUGE carbon credits for all the storage!!   Each tanker is "bottling up" a significant amount of carbon.    They're keeping it from escaping.....you know this "regulation" is coming.

 

Thu, 01/20/2011 - 08:53 | Link to Comment BRAVO 7
BRAVO 7's picture

   read the lindsey williams interview by alex jones. williams has been reporting from inside sources that the elites would raise the price of crude to $150 then on to $200. heard it 2 months ago.

www.prisonplanet.com/ crude-oil-price-targeted-for-150-200barrel-says-longtime-friend-and-c onfidant-of-two-retired-top-oil-execs.html 

6 one way 1/2 dozen the other way. what is the difference? $200 barrel of oil or door # 2 dollar depreciated 99%. all the same thing. fiat currency that is worthless and sheeple scratching their collective heads debating on zero what just happened. was it natural or was it orchestrated.  also i noticed the fed dusted off their old hand puppet "mr. magoo" greenspan to publicly speculate that a gold backed currency might not be such a bad idea.  the interpretation:  gold confiscation !!!  greater good theory of course.

wash  spin  repeat the cycle.   baaaah    baaaah

 


Wed, 01/19/2011 - 20:02 | Link to Comment Sutton
Sutton's picture

In the neighboring ghetto, many "youths" have taken control of the Forties market.

Wed, 01/19/2011 - 20:09 | Link to Comment CrashisOptimistic
CrashisOptimistic's picture

Maybe.  Seems unlikely.  There is quite a pipeline array for Europe's access to this oil.

http://www.theodora.com/pipelines/norway_sweden_denmark_pipelines.html#map

 

Wed, 01/19/2011 - 20:10 | Link to Comment NOTW777
NOTW777's picture

good grief - is there any thing that is not manipulated

Wed, 01/19/2011 - 20:12 | Link to Comment Trimmed Hedge
Trimmed Hedge's picture

Hey, if you can't beat 'em -- join 'em!

Wed, 01/19/2011 - 22:37 | Link to Comment metastar
metastar's picture

Not sure  agree, but ...

Someone once said, "life isn't fair, and ain't that a wonderful thing!"

Wed, 01/19/2011 - 20:19 | Link to Comment rubearish10
rubearish10's picture

I'm still thinkin' there are many tankers loaded with Crude out at sea looking for port. IOW,s (in other words), supply is abundant.

Wed, 01/19/2011 - 20:25 | Link to Comment spencer
spencer's picture

what happened to search window?

 

Wed, 01/19/2011 - 20:26 | Link to Comment chump666
chump666's picture

Maybe.  That's reality of mid/larger players in the commod markets.  No big deal, if China goes blonk in 3-6mths, or at least a potion of their economy crashes.  The sell on oil could be swift.  The meltup now is gradual, a spike is due, in that case then a major sell.  I'd say on $95 WTI in a month or so.

Oil market is gonna be a money spinner till the meltdown. 

As far as commod manipulators remember what happening to Yasuo Hamanaka aka Mr Copper?  

Wed, 01/19/2011 - 20:36 | Link to Comment Logans_Run
Logans_Run's picture

Gotta love that excess, cheap liquidity pouring into hot commodities! It is 2006-07 all over again.

Wed, 01/19/2011 - 21:06 | Link to Comment PC Load Letter
PC Load Letter's picture

Yup, this is what happens when an entire economy is based on cheap money, bubble creation and no regulation.

Wed, 01/19/2011 - 22:40 | Link to Comment Cdad
Cdad's picture

The price of oil, Texas or Brent, is the product of a broken futures trading market.  Real price discovery might actually occur if position limits were put on players, OR additional delivery dates were added to the schedule, OR futures traders were required to put up more capital to secure their positions...OR all three.

Every other stupid conversation about the price of oil is just that...stupid, as in ignorant...as in not well informed...as in NOT BECAUSE OF PEAK OIL!

Like everything else being revealed about our markets, greed has broken the system, and greed and stupidity [DC] has rigged the game. 

Answer...take the bus.  Close your wallet.  Drive less.  Take you money out of the market.  Take your money out of the bank.  Starve the system until the cronies are dead and gone.

In the meantime, behold...the morally depraved stud man USD shall intervene on the behalf of Average Joes everywhere...and prices be goin' down. 

The spot price of crude is a short...a tough one, but a short nonetheless.

Wed, 01/19/2011 - 22:50 | Link to Comment Stuck on Zero
Stuck on Zero's picture

The story behind this is intriguing.  It begins with the UK Weather Service knowing that a terrible, glacial winter was in store for the UK based on the path of the jet stream. Instead of informing the public that it was in for arctic weather it told everyone the winter weather would be mild.  Brent futures went low and people on the inside purchased huge blocks of Brent Crude futures. Now, with glacial weather upon the Isle Brent futures are soaring and people are living in unheated homes. Will there be an investigation?

A proper reference is here:

http://www.telegraph.co.uk/topics/weather/8237397/Met-Office-kept-winter...

Thu, 01/20/2011 - 01:36 | Link to Comment Element
Element's picture

I've been tracking the price difference between the US and Asian oil per barrel and the bowser price in the US and Australia sine the July 2008 peak oil price per barrel.

THE AIM:

Simply to see if the changes in the price of a barrel of oil, in the US and Australia, remained proportional to the price we paid at the petrol bowser.

Or if this price we consumers pay wasn't proportional to the price change per barrel, then how much did it vary?

And was the variation in the price at the pump increasing, with respect to the forward price changes in oil after July 2008.

--

I think we all can accept that speculators have been jacking up oil, above that of demand, in this period, especially in 2010.

But that is not what I'm looking at here.

This is only bout the difference the refinery pays for the oil and the proportional differences we pay at the pump.

i.e. I wanted to know if the refiners were ALSO screwing us.

So, this is what I have found

--

Firstly, the starting conditions - on about 11th July 2008 when USD oil peaked this was the situation:

MAX US Bowser Price per US Gal ~$4.11

Exchange Rate $USD-$AUD (at that time) $1 USD : ~0.9200 AUD

US Gallons converted to Litres = 3.785L

MAX Bowser Price $AUD per litre on first week Aug 2008 = ~$1.57/L (BTW, if you are wondering, the Australia fuel price at that time was equivalent to paying $5.46 USD per US gallon! You think you were screwed?! This is why I was interested in tracking this price proportionality, to work out who it was that was screwing us most, and if the Govt was doing ANYTHING at all about it.)

MAX US Crude $USD ~$147 USD

Singapore Tapis Crude $USD ~$150.00 USD

--

And when we then compare this with today's figures from Jan 19 2011, we have these conditions:

--

Present Day Bowser USD $ per US Gallon ~$3.20
(hard to get a clear national figure. I don't trust the official national 'average' as anecdotal info indicate the 'average' is BS. So I went with a conservative $3.20 for argument's sake.)

Current exchange rate $USD-$AUD $1 USD : ~0.9950 AUD

US Gallons converted to Litres = 3.785L

National Australian Bowser Price $AUD per litre on Aug 1st 2008 = $1.48/L

US Crude $USD $91.35 USD

Singapore Tapis Crude $USD ~$103.82 USD

--

So far, so boring.

But I have been tracking the price changes daily, in a spreadsheet since this 2008 peak oil price - until now.

Why?

I smelled a rat. Our petrol prices at the bowser were clearly being manipulated, EVERYONE knew it was, it was completely blatant, and the Govt did NOTHING to rein it in - it is STILL doing NOTHING.

I wanted to see if it was getting dealt with, or ignored, and if the rip-off, if there clearly was one, was getting worse with time.

Well, you guessed it, after the Sept 2008 collapse, the exploitation got much worse, in the %#$@-ing "recovery".

Keep in mind this pattern of EXTRA price gouging - i.e. 'extra' as in being even in excess of the Pre-July 2008 gouging that was already occurring.

So this is just the EXTRA gouging since, the > MORE < and greater oil-company price gouging on top.

It has next to nothing to do with REAL inflation.

And keep in mind, this has been going on for 2 years.

I have not gone back prior than this, to see how much the gouging was before this.

... but to the results:

RESULTS:

Proportional Price Difference from July 11 2008 compared to Present-Day 

US Market:
US Oil fall per Barrel  (July 2008 to Present) = 62.1% 
US fall in bowser price per Gal  (July 2008 to Present) = 77.9%

Australian Market:
Singapore TAPIS $USD fall per Barrel  (July 2008 to Present)= 69.2%
$AU fall per litre since  (July 2008 to Present) = 94.3%

--

What this reveals is that the change in the price of a barrel in a market, and the change in the price at the bowser, in that same market, has since July 2008 become wildly DIS-PROPORTIONAL.

It is disproportional in the extreme favor of the oil refiners retail distributors.

Below is the exact figure for this price difference, in their favor, IN JUST 2.5 YEARS of GOUGING - mind you;

--

HOW MUCH EXTRA WE ARE BEING RIPPED-OFF SINCE JULY 2008"

USA's RIP-OFF = 15.7 cents on the dollar

AUSTRALIA'S RIP-OFF = 25.1 cents on the dollar

--

So if you thought you were being shredded at the petrol bowser (or 'gas pump' as you guys call it), you were right, the figures are right there for anyone to  see and check and calculate the differences.

Your 'regulators' and your Govt could act on these.

Have they?

No

Will they?

No

Why?

It's because you live in a blatant Kleptocracy.

It is 'owned' and 'Governed' by global super-criminals.

The Archille's Heal of Kleptocracy is that they may 'own it', and 'Govern it'

But we  R U N  I T.

And we don't have to run it.

They have to keep making sure that we will PARTICIPATE in keeping it running for them, so that they can keep stealing everything from us.

If we stop 'running it' for them and instead start DESTROYING THEM.

Then the kleptocracy will die.

Who needs a corrupt Govt to do it for us?

Or for a 'regulator' that has ZERO intent of ever doing its appointed job?

Then we can reset this crippled system, that simply isn't going to ever recover otherwise, so that it actually functions, in our TRUE best interests, with the crooks in the prisons, as they are supposed to be, rather than owning central banks and prisons and police and Judges and legislators and Presidents.

Don't take my word for it, check the figures yourself, in a spreadsheet.

You are getting gouged ~15.7 cents on the dollar in only 2.5 years of divergence. This is what happens when there is ZERO punishment for unrelenting white collar criminality.

Punish them yourself as the 'Govt' never will. All you will get from Govt is more bluster and denial and derailment and playing for time.

Thu, 01/20/2011 - 05:16 | Link to Comment campag
campag's picture

oil market corrupt ?

August07 $80-/June08 $147-/December08 $40-

Vitol and others still counting the money.Was anyone found guilty of wrong doing?Has the market cleaned up its act -no way.All the recent games so far seem to be being played with crude so that's OK.

Thought European distillate may explode with record low temps in December and French refinery strikes in the same month but no(large contango - odd for this time of year).Maybe its been left alone so the players don't wake up the media/populous.

March arb Brent/WTI gained $1.50 yesterday(now $6.50) seems we will see more. Who is picking up the March cargoes?

No doubt its all being closely watched by our compliance people(SFA/CFTC et all...)The distortion goes on and on and......

 

 

Thu, 01/20/2011 - 09:32 | Link to Comment Downtoolong
Downtoolong's picture

This definitely seems to have the look and profile of a typical squeeze play in the oil market, further indicated by the fact that the Brent/WTI spread falls off in the forward months. Most often the squeeze is actually originating in the paper market though. It’s tough to corner the market in physical crude (unless you're OPEC) when there is so much substitutability of grades in refineries. I say HETCO is buying the physical to deliver against a short paper position on the ICE which they can’t cover at a fair price. Being one of the few traders large enough to play this game, they are probably just trying to capture a spread between physical and paper caused by a paper squeeze on them or someone else. Nonetheless, the article does a good job of pointing out how defective the entire oil pricing system is now that almost all physical oil trade is priced relative to futures. A little manipulation in the paper/futures market goes a long way towards screwing up physical oil pricing around the world which is exactly what happened back in 2008 too. Its Déjà vu all over again.

Fri, 01/21/2011 - 00:24 | Link to Comment sagelike
sagelike's picture

OMG, you guys see nefarious conspiracies everywhere. While there's certainly a lot of shady things going on out there not every unusual occurrence is the result of conscious conspiracy. Sometimes there's a rational explanation.

Please read this article in the Globe and Mail which explains the the divergence:

http://www.theglobeandmail.com/globe-investor/surge-of-alberta-oil-tames...

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