Today's case of alleged (and rather substantial) commodities manipulation comes courtesy of two veteran BP traders and Norwegian tanker giant Frontline. Earlier today the CFTC charged James Dyer and Nick Wildgoose -- former senior traders at oil major BP -- with a manipulative trading scheme. Reuters reports: "The complaint, among the agency's biggest charges of wrongdoing in energy markets, said the scheme yielded more than $50 million in unlawful profits." The two traders, currently working at Arcadia and Pernon Energy, are controlled by Cyprus-based Farahead Holdings, a company controlled by Norwegian shipping magnate John Fredriksen who runs the Frontline, the world's largest tanker company. And since tankers tend to benefit from high crude prices, the question is not why Frontline was doing it, but which other tanker companies have also dipped in the pot but yet not been caught. Also not unexpectedly, at the heart of the charge is the easily manipulated linkage between physical and derivative commodities, which the traders exploited profitably for quite a while.
The Commodity Futures Trading Commission accused traders at Parnon Energy Inc and Arcadia Energy Suisse SA of carrying out a cross-market trading scheme between January and April of 2008 involving accumulation and sell-off of a substantial position in physical crude oil to manipulate futures prices.
The suit stems from trading activities related to interplay between physical oil storage held in Cushing, Oklahoma, the delivery point for the U.S. benchmark futures contract, and the derivatives market. At the time the trades occurred, oil prices were on their way to record levels.
The CFTC complaint alleged Dyer and Wildgoose knew their style of trading could lead to riches.
Dyer said in a September 2007 email to other Parnon/Arcadia traders that there was a "shitload of money to be made shorting" the New York Mercantile Exchange West Texas Intermediate calendar spreads if the rest of the market believed supplies at Cushing were tight, but someone unexpectedly turned end-of-month balance into a "surplus," the complaint charged.
The charges do not seem to be linked to crude's record-breaking spike to almost $150 a barrel in 2008, although the alleged offense occurred during the same time period.
The CFTC alleges the pair did at times try to push prices higher by buying up commercial supplies of crude around Cushing. But they also tried to force prices lower, at times dumping crude to depress prices and profit on short positions, according to the CFTC.
Their attempt to control the direction of the market worked in January and March 2008, the CFTC said, but failed in April, as prices rose by almost $20 a barrel toward $120 over the course of that month. Prices barely paused from then until they hit more than $147 a barrel in July 2008.
The traders executed a manipulative strategy by amassing "a sufficient quantity of physical WTI to be delivered the next month at Cushing to dominate and control WTI supply even though they had no commercial need for crude oil," it said.
As for just who these "veteran" traders are and where they work:
Parnon, headquartered in Oklahoma, owns at least 3 million barrels of storage facilities at NYMEX crude delivery point Cushing. London-based Arcadia is a major global oil trading firm, which typically markets about 800,000 barrels a day of crude and product around the world.
Both are controlled by Fredriksen's Farahead Holdings, based in Cyprus. Fredriksen also controls one of the world's leading oil tanker companies, Norway's Frontline.
Arcadia has been implicated in oil squeeze plays in the past. In 2000, US independent refiner Tosco filed a lawsuit alleging Arcadia and others had colluded to control a large trunk of the physical Brent crude market to drive up prices. Arcadia settled that suit for an undisclosed sum.
Congratulations CFTC: Obama's recently appointed Oil Price Anti-Manipulation Czar can now demand a raise. Now if only you would exhibit the same fervor in pursuing decade old charges of comparable but inverse price manipulation allegations in the precious metals space everyone would be very happy.
Full court filing:Arcadian CFTC