Friday, May 27, 2011

More on CFTC Harassment of Arcadia Oil Traders

As reported previously,  the CFTC has charged Parnon Energy Inc., Arcadia Petroleum Ltd., Arcadia Energy Suisse SA, Nicholas J. Wildgoose and James T. Dyer with the absurdity of manipulating the oil market. This is a big case in an apparently new aggressive CFTC.

Here's John Kingston at Platts Oil with his take on the charges. First how big is this case?
The CFTC this week did something big. Very big [bringing this case]...This is one of the biggest actions the CFTC has taken in the crude market in recent years. When traders dismiss these allegations as nothing more than normal trading activity, they're ignoring a simple fact: the CFTC apparently doesn't think so.

Based on the defiant media statement that Arcadia released after the suit was filed, this dispute is either going to go to trial--"Rather than consent to the resolution of the matter based on allegations that are unjustified and untrue, we accepted that the matter would be adjudicated in the courts," Arcadia said--or it's going to be settled for a lot of money. This won't be a repeat of the $1 million fine that Marathon paid to the CFTC in 2007 on charges of manipulating the market (in a year it made close to $4 billion), accusations that appeared flimsy at the time.
Among many problems with the CFTC case, Kingston points out one potential major problem for the CFTC:
Based on one passage, it seems that the traders did not use the NYMEX as their means to acquire the oil. The acquisition was done in a fairly short period, between Jan. 8 and Jan. 16 of 2008. "Can we get this issue resolved pls. time is of the essence here, we need to trade cash with 3rd parties tomorrow as part of the feb/mar wti strategy," Wildgoose writes in an email to an Arcadia officer, according to the lawsuit. The reference to "cash" can be interpreted to mean the trades went on in the OTC market.

One question, and this is sheer speculation: did Arcadia/Parnon want the industry to know it was acquiring such a large position? Based on the lawsuit, it wanted the market to think the tanks were drying up, so maybe not. But if you want to take a large position and do it anonymously, the place to do it is on the NYMEX. In the "old days," when trading was done by open outcry, floor brokers could see that broker A was buying a lot of oil, and since broker A usually handles the needs of oil company B, that meant oil company B had a play on. Since that trading is now almost completely virtual, that market intelligence is no longer available. But if the company bought a lot of February oil in the cash market, its activities might have been noticed, which would have undercut trying to persuade that there was growing tightness in Cushing.

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