In a 2011 senate hearing, Exxon Mobil (NYSE: XOM) CEO Rex Tillerson went on record in saying that oil prices should have been anywhere from $60 to $70 based on supply and demand.
He went on to say that prices hovered around $100 a barrel because major oil companies used futures contracts to lock in higher prices, and he cited the role hedge fund speculation plays in keeping prices higher than normal.
When you hear it straight from the horse’s mouth, the issue of oil price manipulation is pretty hard to deny.
More recently, four NYMEX traders are bringing a lawsuit against Big Oil. Companies including Royal Dutch Shell (NYSE: RDS-A), BP (NYSE: BP), and Statoil (NYSE: STO) allegedly colluded with Morgan Stanley (NYSE: MS) and Vitol Group in the manipulation of spot prices for Brent crude since 2002.
These plaintiffs claim they paid “anticompetitive” prices in a rigged market, Bloomberg reports.
And this isn’t the first time Shell and BP have been accused of this type of fraud. In May of this year, the European Commission raided the offices of these companies in search of price-rigging evidence, but the investigation has yielded little so far.
But this latest suit would be the seventh lawsuit alleging price manipulation in the Brent market.
According to the allegations, these companies have been feeding false information to energy reporting agency Platts to get the best outcome on the market.
Platts uses what’s called the market on close system (MOC) – a daily half hour window in which the energy reporting agency determines prices based on trades and bids.
But there is little vetting or confirmation of the information given – making it all too easy for anyone to provide whatever information they wish to suit their own agendas.
It was during this period that Big Oil allegedly fed tainted information. Platts has not been cited as a defendant.
Commodities Fraud
Price rigging has allegedly been going on in the spot, futures, and swap markets.
In particular, the defendants have been accused of spoofing – placing orders in the markets with the intention of canceling them later.
However, it will be very hard to successfully prove the defendants committed any sort of wrongdoing. These types of crimes rarely leave a paper trail, and it is hard to prove what went through someone’s mind as trading occurred.
Even if fraud is proven, consequences will be minimal at best – most likely a fine. Paying due compensation, and even jail time, is out of the question, since many of these oil companies are too big to fail, just like the big banks.
These companies have too much clout and standing to be truly held accountable.
In this most recent lawsuit, there is little evidence from the plaintiffs other than their analysis on the market – but analysis can be a damning assessment. The plaintiffs cite one instance in 2012 where Shell, BP, and others allegedly depressed the market with falsified information but brought it back up at the end of the month.
Over the past five years, oil prices should have been stable, but what have we seen?
Price have been fluctuating from $70 to over $100 in short intervals. The issue of supply has never been in question, despite fears of the Middle East and so on. And as the economy suffered, oil prices should have been much lower based on lower demand from a weak economy. Consumers did not have enough money to foster high demand, yet prices have been quite high over the years.
If you’re a major player in the markets and have an oil portfolio at just $70 a barrel, it is all too easy to pump the markets with false information and fictitious trades. All you have to do is spread fear among traders about a potential collapse in the markets or doomsday scenarios in the Middle East, and you’ll have oil prices at over $100 in the next month.
There is little evidence to support this, but it is all too easy to imagine.
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But this rampant speculation and manipulation of markets has consequences at your local grocery store and the gas prices you pay at the pump as well. Food companies dictate deliveries based on oil prices, and if prices are too high, odds are good that your favorite bag of potato chips will be that much more expensive.
This can have life or death consequences in poorer countries, where high prices could lead to food riots and mass starvation of livestock, which then leads to further poverty and famine. A drastic rise in oil prices could lead to needless deaths across third world nations.
And this affects you as an investor, since you could be buying into a system that has already been planned for you.
But What About WTI?
WTI is less exposed to the international markets, but let’s not forget the power of hedge funds injecting funds and speculating in whichever market they choose. WTI and Brent are intertwined like never before because of the world financial system, along with the rest of the commodities markets.
And the U.S. is also dealing with rigging scandals.
Barclays Bank (NYSE: BCS) may face a $470 million fine by the Federal Energy Regulatory Commission for allegedly trying to manipulate prices in California from 2006 to 2008.
JPMorgan Chase (NYSE: JPM) is also under investigation by U.S. authorities for alleged spoofing and could face a $500 million fine.
But WTI is still a better choice.
The quality of domestic, light crude is better than Brent. The shale oil boom is yielding record production rates in Texas and North Dakota. And the boom is fueling more infrastructure projects that is allowing WTI to catch up with Brent on the world stage.
For now at least, all you can do is keep your eyes and ears open and watch as these suits unfold.
Unfortunately, you have not heard the last of this.
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