Are the "Special Few" Manipulating Oil Prices?

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Last week, a firestorm hit the markets.

In a shocking announcement it was discovered that a "special list" of users had been paying a fee to Thomson Reuters to receive the University of Michigan Consumer Sentiment Index figures two seconds early.

And while most market analysts were aware that there are several tiers of service available for these figures, only a select few knew a higher payment could get them the figure before it is released.

Two seconds. It may not seem like much but it's enough to trigger a massive spike in computerized transactions before the market even knows what the figure is–let alone the average investor.

So what difference does a such a brief leg up to a "special few" mean anyway?…

Quite a bit given what we know about today's computer-generated mega trading programs that make big profits on fractional changes in price.

The massive volume of these transactions destabilize trading environments, cause instantaneous volatility spikes, and drive a range of results having nothing to do with fundamentals or actual conditions.

Not to mention how it all flies in the face of the idea free exchange markets are justified on the outmoded assumption that there is equal access and availability of information.

Now there are possibly even more serious questions emerging and they involve a matter directly relevant to you.

We are learning the same manipulation may be occurring in the energy sector.

Similar Spikes in the Oil Markets

Following the revelations on the Sentiment Index figure, studies have been undertaken on spikes in trading just before other figures are released. And some of the preliminary results are disquieting to say the least.

Similar massive computer-generated trades have been taking place about five seconds before the weekly report of oil and oil product inventories. The spike is not huge each week, but in some cases is large enough to dictate trends in pricing for hours afterward, sometimes for the entire daily trading session.

Unlike the University of Michigan number, the Energy Information Administration (EIA) weekly figures have a pronounced effect on crude oil futures contract prices on the NYMEX.

That, in turn, directly controls hundreds of billions in futures, and trillions in options, swaps, and other derivatives based upon them.

This matters well beyond whether Auntie Pearl in Peoria feels confident about buying a new dress.

The EIA figures are released at 10:30 Eastern on Wednesdays, expect in those weeks were there is a trading holiday. In that case, they appear the next day.

The data tell us what U.S. domestic crude oil and oil product inventories, along with refinery capacity, looked like the previous Friday. True, the government figures are based upon data supplied by the companies and there is no independent verification of those figures. Then too, there is little attention to an increasingly utilized ad hoc secondary shadow trading in wet (actual oil) and paper (future consignment commitments) contracts.

But these are the figures that drive the short-term prices of oil/oil products and the myriad of investments based upon that price. Of greater interest to a number of heavy hitters on the paper contract side during times of pricing volatility involves crack spreads.

These spreads play derivatives and futures in crude oil against those in major oil products – gasoline and low sulfur content heating oil in particular. Those heating oil contracts, in turn, are quite important in determining diesel prices.

That is because low sulfur heating oil and its equivalent grade of diesel are produced from the same "refinery cut," that is, they result from the same stage in the distillation process. The weekly EIA distillate figures are essential for diesel prices, which are in turn a fundamental element in an entire range of consumer product prices. But diesel is more of a wet rather than paper trading environment. That makes the heating oil surrogate a decisive bridge for spread traders.

Gaming the Oil Markets

I have talked about the importance of crack spreads before. But with an ability to know the inventory figures up to five seconds before the market does, major market makers can swing entire portions of the energy curve.

Here the emphasis, yet again, is on making profit from an artificially created market move. One generates the initial wave and then rides it with additional derivative and option placements or shorts it, depending upon the broader market reaction.

Much like dealing a poker hand and knowing the cards each player received before they even see them.

It is required that regulators quickly ascertain what is happening in these trades. Of course, many of these early trades may simply be bets on what is about to happen, or guestimates on trends. Unfortunately, too many of these moves placed seconds before the EIA releases its figures appear to be correct based on the data released.

Energy prices have a pervasive effect on all segments of the economy. Early access for computer programmed trade is not simply the use of the latest technology. It is a fundamentally unacceptable practice reserved for a privileged few.

And that group will never include the average retail investor.

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About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle

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  1. JB | June 18, 2013

    Who are the 2-3 Top oil and gas drillers in the New Zealand -Bakken anybody know?
    Are Origin Energy and Contact Energy any of the two if so are they worth investing in?

    • Mike | June 19, 2013

      TAOIF and NZERF. You can Google New Zealand Oil Companies (as I did) and work your way through all of those listed … and you will end up with these two companies and complete website analysis (with pictures) from each of these firms that will convince you that your immediate investment … in both firms … is both necessary … and wise.

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