The CFTC and Department of Energy Snore Away While the Oil Patch Makes Hay

Mar 18, 2010 | Updated May 25, 2011

Late last week the Energy Information Service-advised oil stocks surged by 1.762 million barrels, far more than expected, while the U.S. refinery processing rate sank to 79.7% -- the lowest level in more than two decades. Yet on Monday the price of oil jumped by $2.50 a barrel.

What is going on? We don't really know, but it is clear that the price of oil as currently constituted no longer has anything to do with the market dynamics of supply and demand.

Of course there are the usual saws: dollar flight, seeking safety in physical assets, speculation, peak oil theorists, political concerns, contango spreads, rebounding economic activity, China, India and on and on, being put forward by the talking heads and those searching to rationalize the inexplicable, or more tellingly, those allied to or within the industry seeking to deflect, where possible, any serious examination of oil prices and their genesis (please see "Thank You, Exxon CEO Rex Tillerson For Educating Us On Oil Prices"). None of these "explanations" individually or in combination justify the enormous distortion in price for a market that is filled to the brim with product both on land and at sea with VLCC tankers at anchor waiting weeks and months on end to discharge their cargo.

This, in spite of the broadcasted declarations by entities such as the CFTC earlier this year, that a series of restrictions on energy trading would be set forth (please see "Wall Street Stampedes to The Aid Of the Oil Speculators") and as far I can tell, we are still waiting. All this in tandem with the CFTC's determination that the major cause of oil price distortion was because of speculation. The CFTC was responding not only to an outraged public, but it also chose to broadcast its views concurrent to the pronouncements by the heads of state of Great Britain and France who jointly called for "transparency and supervision of the oil futures market in order to reduce damaging speculation."

CFTC hearings were held late in July and extraordinarily cogent testimony on the issue was presented by Senator Bernie Sanders of Vermont, which was given little attention by the press and successfully buried by those whose interests weren't served.

Our friends at OPEC, however, with less fanfare, simply assured us that pricing in the $40, $50 even $60 a barrel range were not in the oil-consuming world's interest. That we would be better served by higher prices. That "taking our interests to heart," Saudi Arabia and most especially King Abdullah felt that prices in the $75/$80bbl range would be more appropriate (please see "The Nightmare Scenario: Thank You Saudi Arabia For Looking After our Future"). And here we are some months later with prices at these levels even though the world is as awash with oil as it ever has been.

What is going on? It is the CFTC's job to find out and not simply be placated with the oil patch shibboleths referred to above. It just makes no sense. Are OPEC and Saudi Arabia using their enormous cash holdings to game the futures markets on which the price of oil is based? As mentioned in an earlier post, why did Saudi Arabia suddenly and only recently drop the widely used West Texas Intermediate (WTI) oil contract as the benchmark for pricing its oil, substituting a new London-based "Argus" index? Explanations offered talk about disparity in pricing, and were quickly applauded by the IEA in its new mantle as Oil Industry apologist (please see "The International Energy Agency Shills for OPEC, the Oil Speculators and the Peak Oil Pranksters"). But could it be that with the potential of a more vigilant CFTC, the WTI contract, primarily traded on the NYMerc, becomes more difficult to "influence"?

And perhaps the Department of Energy could climb down from its professorial aerie of alternative energy issues for a few moments and get its hands dirty in dealing with the everyday concerns of American consumers and their economy.

So far the CFTC has talked the talk while the oil patch players from the major producers on down have walked the walk, stepping on all of us. Who is looking after our interests while our government agencies do a little high-step grandstanding to the cheers of the Wall Street Crowd?