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Ready for the Oil Bubble?
Ft. Worth Star-Telegram ^ | May 21, 2008 | Ed Wallace

Posted on 05/22/2008 5:51:24 AM PDT by wildbill

Ready for the Oil Bubble? Source: http://www.star-telegram.com/104/story/651928.html

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One law is causing prices to go through the roof By Ed Wallace Special to the Star-Telegram

"There’s a few hedge fund managers out there who are masters at knowing how to exploit the peak [oil] theories and hot buttons of supply and demand and by making bold predictions of shocking price advancements to come, they only add more fuel to the bullish fire in a sort of self fulfilling prophecy." — National Gas Week, Sept. 5, 2005 as reprinted in the US Senate Permanent Subcommittee on Investigations’ report, "The Role of Market Speculation in Rising Oil and Gas Prices," June 27, 2006

Fiddling While We Burn

There it is in plain sight for everyone to see, exactly what I’ve been reporting for the past few years: Many individuals who are investing in oil and natural gas futures are going out in the media and trying to convince the American public that either we are out of oil or there is a serious supply shortage of crude against worldwide demand. The question is: Does it surprise you to discover that the US Senate investigated the rigging of the oil market by speculators in the summer of 2006 – and concluded that there was no supply and demand problem with oil? Did you know that their conclusion was that speculators were responsible for a 70 percent overcharge in the price of oil in the months leading up to the summer of 2006?

This from page 1 of the Executive Summary of that Senate investigation, there is this one troubling line: "Today, U.S. oil inventories are at an eight-year high, and OECD (Organization for Economic Co-operation and Development) oil inventories are at a 20-year high."

That’s odd because, in 2006, just like today, the media reporting covered the serious international shortage of oil and justified oil’s high price. Even more troubling is that the House of Representatives held a hearing this past December, ominously titled "Energy Speculation and Price Manipulation." How did it pass under the radar that both the Senate and the House studied the issue of price manipulation in our energy markets and both concluded that it was unregulated, massive trading in one futures market that was really driving up the price of oil and natural gas? And given that conclusion, why has Congress done nothing about it?

Investors Make the News, Literally

A week ago Goldman Sachs issued a new investor note, suggesting that somewhere between six months to two years, the price of oil could go into a "super spike" and prices jump as high as $200 per barrel. It became the major story of the night. Ignored in the reporting frenzy was that many legitimate and well-respected oil analysts dismissed Goldman Sachs’ prediction as groundless.

Get ready for the next shock to your system. In the past month we have added 11.9 million barrels of oil into our stock reserves, giving us 32.3 million more barrels of oil than we had on hand January 1. On May 5, we found out that for the second time in as many years, Iran was storing its excess crude oil on tankers in the Persian Gulf, because it had run out of storage space in the desert and was awaiting buyers for its heavy crude. That same day Saudi Arabia cut the discount price for its Arabian Heavy crude to $7.45, hoping to entice more buyers for immediate delivery. We didn’t hear that news, either.

While researching my third article for BusinessWeek online about the world’s oil situation in 2008, I asked for the most current report from Oil Movements. Because the oil industry is not transparent, Oil Movements tracks every tanker at sea, from both OPEC and non-OPEC oil countries, along with their cargoes’ final destinations. Anne O’Shea responded immediately to my request with their report dated May 8, 2008. Just so you will know, oil shipments are up from a year ago in almost every class, including Middle East oil in transit and Non-OPEC in Transit. The only class of oil shipment that has declined is covered on page 3 of that report. That chart is labeled, "4-Week Changes in Westbound Oil at Sea."

That’s right, shipments of oil headed west have shown serious declines during the month of April, down 800,000 barrels per day in the week before the publication of the report. Now, let me give you the first line from under the Westbound Oil shipments chart: "In the west, a big share of any [oil] stock building done this year has happened offshore, out of sight."

Could this be true? Oil Movements, the unimpeachable source for finding the real world situation on oil transits, is saying that oil is being hidden offshore, not declared in inventories? Yes, that is exactly what they are saying.

That same week our refineries cut their production runs back to 85 percent, down from 89 percent a year ago, to trim more gasoline out of our stock reserves, to increase their profits per gallon.

National Short-Term Memory Loss

It’s amazing how quickly we forget our recent history. Congressional hearings in 2001, blasting certain Wall Street executives for using the media to sell the public on stocks in order to bid up the price – so their firm could divest of its shares without taking a beating. Meanwhile, other trusted advisors pushed stocks that were fundamentally worthless, because their affiliated banks had large loan agreements with those companies.

The year before Enron had been caught manipulating the California energy market, even forcing rolling blackouts across the northern part of their state apparently just for effect – to support their claim that there just wasn’t enough electricity to go around. Again, we now know that claim was untrue. It was Enron shutting down certain power generation plants, while placing bets on their unregulated energy futures market. The net cost to California consumers was almost $8 billion.

It didn’t end there. Amaranth Advisors, a hedge fund, literally was cornering the market on natural gas futures, to make it appear that there was a shortage of natural gas, when the Commodities Futures Trading Commission told Amaranth to liquidate its position on the NYMEX because its bidding had already moved natural gas prices far beyond the reasonable limits of supply and demand. Now, remember this name: ICE, short for Intercontinental Exchange – the "dark futures lookalike market."

Once the CFTC told it to back off its natural gas futures contracts, Amaranth simply shifted gears, got out of the NYMEX, placed its massive bets outside of government regulation in ICE and managed to drive natural gas futures to $8.50 per MBtu.

As the Senate investigation into the manipulation of the energy markets showed, "Amaranth – the day before they failed, natural gas was about $8.50; the day after it failed, it went to $4.46 MBtu." That’s right, one major hedge fund managed to double the price of natural gas simply by loading up on futures contracts; when the government told them their bets were unwarranted, they simply moved their monies to a futures exchange that was unregulated. Only when Amaranth failed did natural gas prices fall back to what was considered normal for supply and demand.

Sadly, like oil today, when this was happening we were being told that natural gas supplies were tight worldwide. That statement simply wasn’t true.

Dark Future

Likewise, British Petroleum was busted for manipulating the propane market in the winter of 2004 and fined $373 million. Of course, in Texas, under deregulation of our public utilities, our electric rates can be set using the futures market for natural gas, so the manipulation of the natural gas market spelled trouble for us. Consider this, by 2006, according to www.powertochoose.org, electricity rates for us had climbed to 15 cents a kilowatt-hour due to the high cost of natural gas. But, that was the exact same time period that Amaranth was proven to be manipulating the market and sending natural gas futures through the roof. Two months later the hedge fund collapsed and natural gas prices fell. Therefore, most Texans paid higher electric bills for Amaranth’s manipulation of the natural gas market.

Professor Michael Greenberger of the University of Maryland, a former board member of the Commodities Futures Trading Commission, testified in front of the House Committee on Energy and Commerce on December 14 of last year. Under discussion that day was the manipulation of the energy markets and prices, but Professor Greenberger added these comments: "Three, four months from now, you’re going to have a hearing on the subprime meltdown, and you’re going to find that the very same legislation [deregulating energy] deregulated something called collateralized debt obligations, CDOs." That legislation, friends, directly ties the mortgage meltdown to the high price of energy today.

It was called H.R. 5660, the Commodities Futures Modernization Act of 2000. At first this bill went nowhere in the House, not even up for debate. Then, a few months later, late one night a 242-page bill written by Wall Street lawyers, with the exact same name as the former House bill, was quietly added to an 11,000-page appropriations bill, and the Enron loophole was created. The power behind that bill was one Texas Senator, one Texas Congressman and their wives.

Next week: How the unregulated futures market pushes the price of oil, natural gas and gasoline far beyond those commodities’ market value, thanks to the creation of the Intercontinental Exchange. Worse, Congress knows this, but does nothing.


TOPICS: Business/Economy; News/Current Events
KEYWORDS: energy; gasoline; oil; opec; prices; speculation
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How special interests and speculators manipulate the price of oil.
1 posted on 05/22/2008 5:51:25 AM PDT by wildbill
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To: wildbill

AOL and Lucent were at $80 a share
250,000 Homes were selling for 500,000
Hoping beyond hope Oil is next


2 posted on 05/22/2008 5:53:42 AM PDT by icwhatudo
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To: thackney

ping


3 posted on 05/22/2008 5:56:41 AM PDT by kcm.org (He became poor, so that we might be rich)
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To: wildbill

Also disclosing why the only things worse is government control.


4 posted on 05/22/2008 5:57:01 AM PDT by Manfred the Wonder Dawg (Test ALL things, hold to that which is True.)
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To: Shermy; okie01; thackney

ping


5 posted on 05/22/2008 5:57:39 AM PDT by dirtboy
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To: wildbill

I share in this theory as well. You cannot discount the devalued USD, but that is also someone a rsult of energy prices. The bottom IS going to fall out of this, there is nohing substantial to support these prices. If only I could predict when... but then again, that is the million dollar question.


6 posted on 05/22/2008 5:58:44 AM PDT by FunkyZero
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To: FunkyZero

$150 before $100 or $90 again.


7 posted on 05/22/2008 6:03:35 AM PDT by Eric in the Ozarks
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To: wildbill

Yes, and once oil prices come down to earth, we will see the sob stories on the national news of offshore oil workers losing their jobs, etc., etc.


8 posted on 05/22/2008 6:04:00 AM PDT by magellan
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To: wildbill

Here's your "oil bubble"...................It ain't gonna pop any time soon..........

9 posted on 05/22/2008 6:04:18 AM PDT by Red Badger ( We don't have science, but we do have consensus.......)
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To: 4CJ
"There’s a few hedge fund managers out there who are masters at knowing how to exploit the peak [oil] theories and hot buttons of supply and demand and by making bold predictions of shocking price advancements to come, they only add more fuel to the bullish fire in a sort of self fulfilling prophecy." — National Gas Week, Sept. 5, 2005 as reprinted in the US Senate Permanent Subcommittee on Investigations’ report, "The Role of Market Speculation in Rising Oil and Gas Prices," June 27, 2006

bump

10 posted on 05/22/2008 6:06:46 AM PDT by kcm.org (He became poor, so that we might be rich)
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To: Red Badger

If a oilman as successful and as savvy as T. Boone Pickens is pumping billions in to wind farms, and if he says high oil prices are here to stay, you have to pay attention. He is no fool.


11 posted on 05/22/2008 6:06:46 AM PDT by twntaipan (NOBAMA!)
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To: All

/popcorn

Man, I love me a good cospiracy theory.


12 posted on 05/22/2008 6:07:15 AM PDT by WarToad
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To: All
/popcorn

Man, I love me a good conspiracy theory.

13 posted on 05/22/2008 6:07:38 AM PDT by WarToad
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To: wildbill
From a Telegraph story: "Saudi Arabia is adding 300,000 bpd to the market in response to a personal plea from President George Bush, and to placate angry Democrats on Capitol Hill - even though Riyadh insists that there are abundant supplies for sale."

Yet everytime the President asked, the media reported the Saudis told him no.

14 posted on 05/22/2008 6:09:17 AM PDT by Williams
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To: Red Badger

Well, if this article is factual, there is going to be a huge glut of oil at some point, leading to the inevitable.

Hopefully, they will run out of places to put the oil.

But the bigger this bubble gets, the bigger the pop will be.


15 posted on 05/22/2008 6:10:32 AM PDT by B Knotts (Calvin Coolidge Republican)
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To: twntaipan

Anything he says is a self-fulfilling prophecy, and he knows it.


16 posted on 05/22/2008 6:11:24 AM PDT by B Knotts (Calvin Coolidge Republican)
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To: Red Badger

I refer everyone to the statement by the Saudi Oil Minister.

He said they would produce more and sell it—if there were buyers.

This is a delicate way of saying the oil speculators are driving up prices beyond the normal effects of supply and demand.


17 posted on 05/22/2008 6:11:45 AM PDT by wildbill
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To: Manfred the Wonder Dawg
Ed has a Saturday morning radio show on KLIF in Dallas. He does an oil report about 9:10 CT and he has been explaining this article for a month - but in writing it looks worse. We have been getting the shaft by our congress - Republicans - because they love the money in their pockets not less government.

It takes many people and ideas, that cross party lines, to make this junk happen in congress. Trading the laws Ed mentions for votes against drilling is one way that we are making life hard for hard working people.

18 posted on 05/22/2008 6:14:15 AM PDT by q_an_a ( that is right not out in public in the media in mialings to citizens ther)
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To: wildbill

Goldman Saks is doing far more than the oil companies to reap a profit from us all right now.

Oil companies are running 8-10% profit, Goldman’s speculation and price manipulation is making them FAR more profit than that, and the oil companies are riding on their coat tails with a smile on their face.

If Congress wants to investigate something they should look at any collusion between the two managements.


19 posted on 05/22/2008 6:22:57 AM PDT by Abathar (Proudly posting without reading the article carefully since 2004)
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To: wildbill
I have observed that so many of the people I correspond with who were so quick to be happy when they could fret about a “housing bubble”, or previously an “asset bubble”, each having the mandatory “tipping point”, have not been nearly as interested in applying the same criteria to the rapid run-up in the price of oil and gasoline.

This tells me that their original scolding of the rest of us was not entirely based in economics, but maybe was really a projection of some other personal issue, like maybe they were secretly cheering what they hoped was the impending disaster. For stocks and real estate, the “disaster” would not be in the run-up in prices, but in the “collapse” that would follow. For oil, the “disaster” is high and ever-higher prices. Any collapse in price would only be good news for the economy. In previous asset bubbles the phrase “tipping point” was mentioned so often it got worn out. In this bubble, I have not seen the phrase used once.

20 posted on 05/22/2008 6:27:29 AM PDT by theBuckwheat
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