Bill Cara: A study of energy markets shows manipulation, Mon., Sept. 18, 2006, 6:48 AM

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September 18, 2006

A study of energy markets shows manipulation, Mon., Sept. 18, 2006, 6:48 AM

As I interpret the charts in a Merrill Lynch energy study published on Friday Sept. 15, there is collusion between the energy companies and between certain traders of futures markets. As I see it.

Charts 14 through 17 show refinery margins of the four regions of the U.S.: Gulf Coast, Midwest, East Coast and West Coast.

Do you see how immediately following Hurricane Katrina the margins doubled, tripled and quadrupled across the country? The American consumer was ripped off as the industry profits skyrocketed based on its exploitation of an economic and social catastrophe.

If supply is cut-off, costs rise, and margins fall, in the normal course -- but not post-Katrina for the energy industry. That can only happen because of collusion.

Charts 18 and 19 show refinery margins for Europe and Singapore. Note the doubling and tripling of refinery margins in that part of the world, post-Katrina.

That can only happen because of international collusion.

The charts of the Merrill Lynch report that really get to me are those (charts 8 to 11 on inventory, and charts 12 and 13 on demand). Since Merrill Lynch has produced these charts from Dept of Energy data, I can only presume they are accurate.

There is no inventory demand-supply issue here that has given rise to collapsing oil prices. So what gives? Politics?

Do you see a dramatic drop in demand for Gasoline or Distillates (like fuel oil) this summer as energy prices have collapsed? I don't see it.

And how about inventories of Crude Oil since early August when prices started collapsing? Does chart 8 show them rising, or falling?

So for Crude at least, inventories have fallen and demand has stayed flat. Ergo collapsing prices? Nonsense; that's not Econ 101; it's nothing more than CNBC 101.

And, yes, inventory of Distillates has substantially increased, but so too has demand recently, as it will through the winter. And supply has increased because of an unseasonably cool summer in the U.S., which has led to deferred decisions to order fuel supplies for the winter. But purchasing agents and consumers will make those orders.

Not being an energy analyst, I won't say more. I'll invite experts to address this issue.

But I can't help but think that consumers and independent traders are being conned. As usual, the foxes have control of the hen house.

Posted by Posted by Bill Cara on September 18, 2006 06:48:03 AM | Category: Commodities

Discourse

Bloomberg article today on Hedge Fund manipulation
of markets in Asia.

http://www.bloomberg.com/apps/news?pid=20601087&sid=agThomYd4IPg&refer=worldwide

Posted by: DollarBill at September 18, 2006 9:07 AM [link]

Gasoline inventories are up while demand is flat, but it's not a huge divergence. (Maybe Ford took back the car keys from the 45,000 workers they're firing? That ought to be great for the economy...)

P.S. Take a look at what the 10 year is doing this morning. Up 4.6 bps at the moment.

Posted by: Craig H at September 18, 2006 9:29 AM [link]

When hasn't there been manipulation? In any market for that matter. I tend to focus more on the tape and it says start accumulating energy positions.

Posted by: smess at September 18, 2006 10:17 AM [link]

I'm not sure about who's manipulating. I always thought oil was over priced because of a 'fear factor' (mid east situation) and hurricane possiblities. With those two issues reduced oil (energy) is returning to market prices, and I believe will stay in the $55 to $65 range unless someother news item (Iran, pipe breaks etc)happens... Aside from that you wrote that we had "an unseasonally cool summer". I don't know where you live but i remember heatwaves in July and August lasting weeks with record temps in the mid west and east. Can you supply back up on this.

Posted by: fa28 at September 18, 2006 1:48 PM [link]

fa28 asked me where I live (he must be a new reader) and would I care to back up my blog statements.

I can only imagine what he's going to ask for when this equity market tanks; but I won't go there. I do see fa28 as a sign of the times -- maybe it's time for me to go on vacation.

I live in Toronto, a small metro area of about 6 or 7 million people who know we were spared the heat waves of 2005. We live within say 500 miles (approx. same weather) of maybe 150 million people, so I think it was ok to use my own experience when I wrote the blog.

According to the Toronto Hydro-Electric System, â€œThe summer of 2005 was about 8% hotter than previous summersâ€?. We received a price break from Toronto Hydro this year because we had a much cooler summer this year.

The senior climatologist for Environment Canada (govt) had this to say during the summer:

(headline) 'We're not burning up,' climatologist says.

Toronto has experienced relatively few smog alerts and above-30 C days this year in comparison with last.

By July 17 last year, there were 30 above-30 C days and 37 smog advisories, compared to this year's six abnormally hot days and 10 smog alerts, Senior climatologist Dave Phillips said.

"That's why I've described this summer as a kind of Goldilocks summer, not too hot, not too cold, just right in between," he said.

Anyway, fa28 you were absolutely right in asking for proof because in San Francisco, there was a heat wave this year, so it's all relative.

I'll try to be more accurate in my writing in future. I wouldn't want to mislead anybody.

Posted by: Bill Cara at September 18, 2006 4:44 PM [link]

The bottom line might be that energy prices will continue to be weaker at least for a little bit -- Which goes well for F and GM.

And this is just when F got tougher and assumed almost the worst for them (lower share, lower SUV vs car sales, etc.). Should we be a contrarian here?

I know this is subjective, but one of the best bets arround is to buy Ford's convertible preferred with a 10% current yield.

This just my humble opinion -- Please be aware that I have been wrong in the past, I might be wrong today and I will be wrong at some point in the future.

Posted by: JP at September 18, 2006 8:18 PM [link]

Gasoline $2.10@Citgo .. least expensive gas in town 9/18/06 Thanks Hugo all the way from VZ ;)

Posted by: C.Note at September 19, 2006 6:46 AM [link]

Bill-

When I see these charts in conjunction with the fact that WTI and Brent reversed price points some days back (as you pointed out) - I can only come to one conclusion. That the powers that be (in the US) are deliberately depressing energy prices to curry short-term favor with a gullible electorate. Does this line-up with your hypothesis? The one you, in the interest of political correctness I think, refuse to elucidate.

BTW this also happened, to a lesser extent, in the last election. Abelson noticed and mentioned it out.

Posted by: rmasand at September 20, 2006 12:22 AM [link]