Traders Accused in Oil-Price Plot
By DAN STRUMPF And LIAM PLEVEN
Three years after launching a probe to determine whether the 2008 oil-market frenzy was fueled by excessive speculation, the U.S. alleged that two traders and their firms operated an international plot to manipulate prices.
In a federal-court lawsuit filed Tuesday, the Commodity Futures Trading Commission accused the traders of running a simple, but effective, scheme in early 2008 that reaped more than $50 million.
In one of the biggest cases ever pursued by the CFTC in the energy markets, the agency is seeking triple damages and disgorgement of gains, according to the complaint, which could amount to up to $200 million.
The CFTC accuses the traders, Nicholas J. Wildgoose and James T. Dyer, who worked for Arcadia Petroleum Ltd., a Swiss commodity-trading firm, and its affiliates, of buying millions of barrels of oil, creating the illusion that supplies were critically low at the nation's central oil hub, Cushing, Okla. That drove up the value of derivatives contracts they already held, the agency says.
After pocketing the profits on those derivatives contracts, the complaint alleges, the traders then executed a similar scheme in reverse, dumping the physical oil they had purchased back onto the market and profiting in the derivatives market.
The traders continued their scheme from January until April 2008, the CFTC alleges in a civil suit filed in U.S. District Court in New York, ending only when they learned of a CFTC investigation into their conduct.
Phone messages left with Arcadia offices in Switzerland and London weren't immediately returned. Arcadia is owned by Farahead Holdings Ltd., a holding company headquartered in Cyprus and owned by Norwegian shipping magnate John Fredriksen. Parnon Energy Inc., an oil-trading firm affiliated with Arcadia that also executed trades in the alleged plan and was named in the lawsuit, as well as an attorney for the defendants, didn't respond to phone messages. Mr. Dyer, reached at his home in Brisbane, Australia, declined to comment. Mr. Wildgoose, of California, couldn't immediately be reached for comment.
IntercontinentalExchange and CME Group Inc., which operates the New York Mercantile Exchange, declined to comment.
The charges come three weeks after President Barack Obama set up a Justice Department task force designed to "root out any cases of fraud and manipulation in the oil markets," after oil prices soared above $100 a barrel. Oil prices rose 1.9% on Tuesday to close at $99.59 per barrel, and are up 9% this year.
The case also comes as the CFTC is considering a new rule aimed at curbing speculation in commodities, a goal of regulators since the 2008 spike that sent crude-oil prices to a record high of $147 a barrel in July.
There is still disagreement about what caused the 2008 price spike. Major oil consumers and some Washington lawmakers blame financial speculators for driving prices up, but many traders and analysts argue that supplies became perilously tight.
Early in 2008, supplies in Cushing hit their lowest level since 2004, around 15 million barrels, making them especially sensitive to signs of a shortage.
Cushing's storage tanks are key because they are the delivery point for the main oil-futures contract traded on the Nymex, the world's most heavily traded oil contract and the benchmark off which much of the world's oil is priced.
"The case will likely turn on whether there is enough here that you can infer the causal relationship" or whether the defendants can say there were "others things going on in the market," said attorney Paul Forrester, a partner in the energy practice of Mayer Brown in Chicago, who wasn't involved in the case.
In January 2008, Arcadia subsidiaries bought a majority of the West Texas Intermediate oil, the blend used to fulfill Nymex futures contracts, expected to reach Cushing in the following month, the CFTC said. They also placed large bets that February futures would trade at an expanding premium to the March contract. As other traders began to notice that Cushing was due to run low on oil, that bet paid off.
Mr. Dyer and Mr. Wildgoose then took positions that would profit on March futures trading at a growing discount to April futures, the CFTC said. When Arcadia began selling its oil, the rush of crude into Cushing deflated the value of the March contract. Arcadia repeated the trade two months later, but stopped when they became aware of the CFTC's investigation, according to the agency.
Betting on this gap, called the "calendar spread" or "time spread," is a common trade in the futures market. However, the CFTC alleged that Arcadia "wanted to lull market participants into believing that supply would remain tight; that they would not be selling their physical position."
As a result of the scheme, the complaint alleges, the spread between key oil contracts was "artificial" on 12 different dates in January and March of 2008.
In no place is that more certain than in today's commodities markets, and in no one sector is the speculator's anthem being song more than in oil markets. Indeed, as Light Sweet Crude prices closed at $119.37 per barrel today, marking the third day of record highs, for some overzealous traders around the globe, this has to be a remarkable moment. (Even London Brent Crude is trading north of $116 per barrel.)
Higher oil prices have also moved quickly into the fuel markets. Using the 1-to-0.03 ratio, whereas every one dollar in the price of oil translates to 3 cents in a gallon of gas, fundamental petrol prices would now stand at $3.5811 per gallon, notably before taxes and the minor markup at the pump. (It will be a few working days before those price actually hit retail consumers.) From a linear projection, barring any geopolitical or weather-related incidents, gasoline prices will arrive at $5.00 per gallon by the middle of September. Strikingly enough, though, diesel prices are already north of $4.00 per gallon, and this has posed a challenge to many logistics businesses, from independent truckers to giants like UPS. Even the airline industry has taken its share of critical blows, following the spike in the price of jet fuel, and now bankruptcies and consolidations are the order of the day in an industry fighting to recoup from the impact of 9/11.
This might also be the one area where non-intrusive action can make a serious difference. As 2007 reached its end, Fadel Gheit, an oil analyst from the venerable Oppenheimer & Co., told members of the U.S. Congress that, because speculation (and not current or projected fundamentals) was driving prices, it was only appropriate to curtail that behavior in the market. "A family of four is going to have to cut corners to benefit a Wall Street trader who makes $20 million a year," he said, adding that this was tantamount to a crime. And with that, Gheit proposed a series of strategies that would tame markets: raising the margin requirement to 50% on each trade; constricting the number of futures contracts traded daily by an given account; and even establishing a minimum holding period for buyers of contracts. Any of Gheit's strategies, though likely to be unpopular with Wall Street America, would do a lot to slow the speculative urges of traders and bring prices back to sane levels, simply by compelling those traders to look elsewhere for profits. It is just unfortunate, however, that our leaders in Washington, D.C., did not have the foresight or courage to take heed.