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Congress, Feds Crack Down On Oil Speculators

Senate passes bill to curb practice while Feds step up investigations

By Mark Huffman
ConsumerAffairs.com

July 24, 2008

The U.S. Senate voted Wednesday 94-0 to approve measures to curb speculation in the oil market, which some say is partly responsible for the recent volatility in prices. Republicans generally fell into line behind the Democrat-backed legislation, despite being spurned in their efforts to attach amendments.

"Right now, Wall Street traders are raising gas prices with nothing more than the click of a mouse," said Senate Majority Leader Harry Reid (D-NV), who sponsored the legislation. "Without regard for anything but their own profits, traders are bidding up prices by buying huge quantities of oil just to sell them at an even higher price."

Republicans said the bill should also contain measures to promote more domestic energy production, including a lifting of restrictions on most off-shore drilling. Democrats rejected their arguments, saying it would take years for those steps to produce additional energy supplies.

"This bill will address the rising cost of gasoline in the short-term, prevent Wall Street traders from gaming the oil markets and ensure that American consumers are paying a fair price at the pump," Reid said.

Feds crack down on oil gaming

The U.S. Commodity Futures Trading Commission (CFTC) is also stepping up efforts to crack down on potential oil speculation after being criticized by Congress for the slow pace of its recent investigations.

The agency has leveled charges against a Dutch firm, Optiver Holding BV, of taking actions to manipulate prices more than a year ago.

The CFTC filed the civil enforcement action in the United States District Court for the Southern District of New York against Optiver Holding BV, a global proprietary trading fund headquartered in the Netherlands, and two subsidiaries – Optiver US, LLC (Optiver), a Chicago-based corporation, and Optiver VOF, a Dutch company.

The complaint also names defendants Christopher Dowson, the head trader of Optiver, Randal Meijer, the head of trading and supervisor of Optiver and Optiver VOF, and Bastiaan van Kempen, the Chief Executive Officer of Optiver.

The complaint charges all defendants with 19 separate instances of attempted anipulation involving the aforementioned energy futures contracts on 11 days in March 2007. The complaint further alleges that in at least five of those 19 attempts, defendants successfully manipulated certain of these energy futures contracts, causing artificial prices.

In three of those instances, the complaint charges the defendants forced futures prices lower, and in two instances, defendants forced futures prices higher. The complaint alleges that defendants profited by approximately $1 million from their manipulative scheme.

According to the complaint, the defendants employed a manipulative scheme commonly known as "banging" or "marking"' the close. "Banging the close" refers to the practice of acquiring a substantial position leading up to the closing period, followed by offsetting the position before the end of the close of trading for the purpose of attempting to manipulate prices.

The complaint further charges Optiver and van Kempen with concealing the manipulative scheme and making false statements in response to an inquiry from NYMEX.

"These charges go to the heart of the CFTC's core mission of detecting and rooting out illegal manipulation of the markets," said CFTC Acting Chairman Walt Lukken.

Markets move lower

Meanwhile, the market price of oil is already moving lower. The price of a barrel of crude fell below $125 for the first time in seven weeks Wednesday, though the price is still up 66 percent from year ago levels.

Analysts say evidence that U.S. demand for gasoline and other petroleum products has dropped in response to skyrocketing prices has made traders worried the oil price spike may have peaked, at least for a time. When the U.S. Department of Energy released its inventory numbers this week, it revealed that gasoline supplies rose by nearly three million barrels last week. Demand for motor fuel averaged 19.9 million barrels a day, the lowest since January 2007.

One analyst, Michael Fitzpatrick of MF Global Ltd., told Bloomberg News that he expects oil prices to settle at $120 to $121 a barrel. Already gas stations are dropping prices, much to the delight of weary motorists.

In suburban Chicago, prices at the pump have dipped below $3.75 a gallon, according to WCBS-TV. The station quotes an industry analyst as saying pump prices could hit $3.50 a gallon by Labor Day.

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