WASHINGTON — A group of financial speculators made $50 million by manipulating the price of oil in 2008, the Commodity Futures Trading Commission charged Tuesday.
The high-profile case underscores how high prices for oil and gasoline increasingly are believed to result significantly from financial speculation rather than solely from conventional market forces of supply and demand.
In a filing with the U.S. District Court for the Southern District of New York, CFTC attorneys alleged that a group made up of oil speculators Parnon Energy Inc., Arcadia Petroleum Ltd. and Arcadia Energy (Suisse) S.A. unlawfully manipulated trading of oil on the New York Mercantile Exchange.
The civil charges are for alleged manipulation during the first four months of 2008, when crude oil was on its way up to the all-time high of $147 a barrel.
The CFTC complaint alleges that the three companies and two executives conspired — during a period of relatively tight oil supplies — to amass big quantities of oil for next-month physical delivery. They were dominating and controlling supply, even though they were not commercial users of oil.
The documents allege that these traders in January 2008 held 66 percent of the 7 million barrels of oil they expected to be in storage at the end of February in Cushing, Okla., where benchmark West Texas Intermediate (WTI) crude is delivered.
The companies allegedly held this large physical position on the final day of trading in the futures market for February delivery — an unusual move since they had no commercial need for the oil.
In holding this deliverable oil off the market, the companies sought to artificially inflate the price of oil futures contracts — sending the signal that supplies would remain tight. Meanwhile, these same companies made large bets in the futures market that the price of oil would plummet in ensuing months.
When they eventually sold their deliverable oil at a loss, that didn't matter to them, because they had switched their bets and were now aggressively betting that oil prices would drop in the futures market, the CFTC alleged.
"The scheme artificially increased the price of crude oil physical, derivatives and other oil products in the United States and elsewhere," the CFTC said in its charging document.
The manipulation involved first pushing up the price of futures contracts, then betting against them — a process called "selling short" in the financial world. An email referenced in the CFTC's charging document has executive James T. Dyer telling other Parnon/Arcadia traders that there is a "(expletive) load of money to be made shorting."
The actions of those firms and two executives — Dyer and Nicholas J. Wildgoose — occurred well before President Barack Obama ordered the April 2011 creation of a Justice Department-led task force to look into energy price manipulation.
However, Tuesday's action raises the stakes for the Justice Department, which will decide whether or not to bring criminal charges. The department has been reluctant to bring cases involving price manipulation because they are hard to prove. The CFTC has historically settled with violators in civil cases by imposing fines that amount to little more than the cost of doing business.
"I certainly think that people like this who do the crime should do the time, and not just pay the fine," said Bart Chilton, a CFTC commissioner, who hoped the Justice Department will bring criminal charges in this and other cases involving alleged oil-price manipulation. "People are outraged that they're paying more for gasoline than they should. They tried to manipulate the market, they should go to jail."
The recent spike in oil prices to $113 a barrel on May 2, amid a period of sluggish U.S. and global economic growth, has refocused attention on the role of speculators in energy markets. A growing number of critics blame excessive speculation for sending oil prices soaring far above what normal market supply and demand forces would justify.
A recent McClatchy investigation documented how end-users of oil historically made up 70 percent of the oil futures market, but today they are only about 30 percent, as financial speculators comprise about 70 percent of the market.
The charges show that speculators who are not end users of oil are nonetheless active in the market for delivery of oil. Big Wall Street financial firms are believed to be involved in the physical oil-delivery market, although there is little transparency to the public — either through regulatory data or Securities and Exchange Commission filings — about how deeply involved they are.
Timothy Carey, an attorney with Dewey & LeBouf in Chicago, is listed as Parnon/Arcadia's counsel. He did not return a call and email requesting comment.
The CFTC said the three companies face up to $150 million in penalties, and if convicted, would have to repay $50 million in allegedly illicit gains.
Parnon Energy is incorporated in Texas but does business out of Rancho Santa Fe, Calif. It's a subsidiary of Parnon Holdings, a wholly owned subsidiary of Cyprus-based Farahead Holdings Ltd.
Britain-based Arcardia Petroleum and Arcadia Energy (Suisse) are also subsidiaries of Farahead, which owns some of the world's largest oil tanker lines.
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