I continue to be fascinated with the possibility that a few speculative traders could dramatically affect oil prices the way we have seen over the past month.
I’m still learning about futures markets for oil, but now Robert McCullough of McCullough Research has released a statistical analysis of recent changes in prices in the futures and spot markets. McCullough was an investigator who exposed Enron’s energy market manipulation several years ago. (See Portland Tribune article.)
Now, McCullough is working with U.S. Sen. Maria Cantwell, who is doggedly pursuing legislation designed to shed new light on the way oil markets work. Read on for down for Cantwell’s press release or read McCullough’s report (PDF 460 kb) at his Web site.
I have another question that I’ve been pondering: Most people seem to agree that it will take seven to twelve years to bring oil to market from offshore wells. But some supporters say congressional approval would have an immediate impact on oil prices, because the markets would anticipate an increased supply.
If that’s true, wouldn’t a crash program to wean the country off oil with alternative energy supplies have an even greater impact on oil prices, since the markets would anticipate a dramatic and permanent drop in demand? I’m just wondering.
New Statistical Analysis Shows that Dramatic Oil Price Increases are Due to Strategies of Major Traders Rather than Market Fundamentals
Cantwell Calls for Federal Agencies to Use New Market Collection Tools to Protect Consumers
PORTLAND, OR – Today, US. Senator Maria Cantwell (D-WA) and Robert McCullough of McCullough Research, a former investigator who exposed Enron’s market manipulation, released a new statistical analysis research report of oil futures and spot market prices. This report shows that the dramatic rise in oil prices in June, and the subsequent fall in price in July, can’t be explained by any of the fundamentals of supply and demand. Instead, it could be a result of the trading strategies of major market players. Cantwell and McCullough said new data collection tools are needed so that federal agencies can identify the culprits and stop any market manipulation.
Cantwell plans to introduce legislation when Congress returns in September requiring the Commodity Futures Trading Commission (CFTC), Energy Information Administration (EIA), Federal Trade Commission (FTC) and Federal Energy Regulatory Commission (FERC), to implement new data collection tools.
“Mr. McCullough’s research clearly shows that oil prices are no longer tied to supply and demand,” said Cantwell. “Statistically, this research shows that prices are spiking absent of a crisis like a natural disaster or supply disruption. However, prices then fell when Congress began serious debate on how to crack down on those who may be trying to manipulate the markets. Research shows that traders may well be in control of the market, not supply and demand, and consumers have been left paying the price.”
“There is evidence of a troubling concentration of ownership in the oil markets,” said McCullough. “This allows a few players to have undue influence on setting prices. However, the regulators are driving blind through this crisis since they are collecting such little information that reveals who is doing what in the market.”
While many reasons have been offered as to why oil prices have been rising or falling on any given day, McCullough Research identified 25 significant events, or public announcements, made in June and July 2008 that historically have been the type that causes the future price of oil to rise or fall. These announcements, in most cases, involved the fundamentals of oil supply and demand. In a few cases they concerned national energy policy, which would be expected to affect future prices.
Research Methodology: A spot price model was employed that used refinery utilization and U.S. petroleum stockpiles as surrogates for fundamental supply. It also included proxy variables for three short-term events: the unrest in Nigeria until the cease-fire announcement, the Saudi production increase announcement, and the change in Chinese retail petroleum pricing. Russian production news was also evaluated.
McCullough Research used the Generalized Autoregressive Conditional Heteroskedastic time series model (GARCH) to analyze price movements in the markets. It determined whether the announcements were statistically correlated with any of the oil price changes in the market.
The statistical results for the model had significance far greater than the .01 level. The short-term events did not prove to be significant in explaining the price fluctuations. The only event or announcement that did prove to correlate was the debate of the Commodity Markets Transparency and Accountability Act of 2008 in the U.S. Congress. During this period prices fell. Interestingly, this was the only announcement or event, which reflected market structure as opposed to supply and demand fundamentals.
For months, Cantwell has been working to bring more transparency and oversight over the oil and gas markets. In April, she called on the Department of Justice to create an Oil and Gas Market Fraud Task Force to examine fraud and manipulation of oil and gas markets. She has repeatedly called on federal agencies including the Federal Trade Commission and the Commodities Futures Trading Commission to use their existing authority to conduct oversight over the oil and gas markets. In June, Cantwell chaired a landmark Senate Commerce Committee hearing which served to highlight many of the oil futures market loopholes.
On June 12, Cantwell introduced the Policing United States Oil Commodities Market Act of 2008 along with Senator Olympia Snowe (R-ME), which would shed light on dark markets where some oil futures are traded. On June 23, she introduced the Prevent Unfair Manipulation of Prices (PUMP) Act, which takes a comprehensive approach to address the loopholes that allow energy traders to evade federal oversight.
McCullough Research is an energy consulting firm that provides strategic planning assistance, and litigation support to a variety of customers in energy, regulation, and primary metals. Retained by Pacific Northwest utilities in the late 1990s/early 2000s, McCullough discovered and analyzed the so-called Enron trader tapes, uncovering Enron’s secret accounting data and exposing their methods of manipulating the electricity markets.
“…Research shows that traders may well be in control of the market, not supply and demand, and consumers have been left paying the price.”…”
What else can explain that when we cut back on driving and other energy use, the price at the gas pump goes down?
Why should we continue to be manipulated by oil energy concerns…who and whatever they are…. when we can focus on developing other forms of energy and be dependent on ourselves – not continue to be at the mercy of the greedy?
“…wouldn’t a crash program to wean the country off oil with alternative energy supplies have an even greater impact on oil prices, since the markets would anticipate a dramatic and permanent drop in demand?…”
Makes sense to me.
Sharon O’Hara
“…wouldn’t a crash program to wean the country off oil with alternative energy supplies have an even greater impact on oil prices, since the markets would anticipate a dramatic and permanent drop in demand?…”
In order for a program to wean the country off of oil to have an effect on energy prices, the program would have to be credible. All of the alternative energy sources proposed so far have defied the laws of physics or the fundimentals of economics. Investors will only respond to numbers that make sense.