by Tina Seeley

30-05-08 The US Commodity Futures Commission, the watchdog over the nation's commodities markets, said its investigation of oil trading will include looking at how the flow of crude may have been used to manipulate prices.
"We're particularly looking at storage and shipping and the ability that that might have in any attempted manipulation or manipulation scheme,'' Commissioner Bart Chilton said. "That's not all we're looking at.''

The CFTC said it's investigating oil trading, the first time it publicized an ongoing probe since 2004. While the commission's acting chairman, Walter Lukken, said this month he doesn't see manipulation as a major factor driving prices, Chilton called the investigation "the No. 1 thing on our radar screen.'' He said it began after the commission "saw some things last December that piqued our interest.''
Surging oil prices, which reached a record above $ 135 a barrel, prompted inquiries from members of Congress about the commission's oversight of energy markets. Lawmakers approved a measure this month to strengthen CFTC oversight of electronic energy trading, and others have called for increasing margin requirements to reduce speculation in the markets.

Higher margin requirements could lead traders to switch to other markets, Lukken said. Asked how shipping and storage operations may come into play in the investigation, he said there had been cases in the past of supply being withheld to move prices.
Congress held three hearings in the last two months at which executives from the largest oil companies, including ExxonMobil and BP, have had to answer questions about rising prices. Crude oil for July delivery rose to $ 127.35 a barrel on the New York Mercantile Exchange.

The CFTC's decision to make its investigation public reflects politics, said Geoffrey Aronow, a lawyer and former enforcement chief for the commission.
"The timing of the announcement is a function of the public pressures to take action in the wake of rising oil prices,'' Aronow said.
Lukken said that "unprecedented market conditions'' compelled the regulator to announce its investigation. US oil futures have doubled in the past year.

Spokeswoman Ianthe Zabel said the last time the CFTC disclosed an ongoing investigation was in 2004, when it announced two probes: into a December 2003 jump in natural-gas prices and possible leaks of reports of mad-cow disease.
"It's not normal for us to talk about this stuff, primarily because the minute you say you're doing an investigation, some people will head for the paper shredder,'' Commissioner Chilton said. The oil investigation is far enough along that the commission could announce it publicly without hindering its ability to gather information, he said.
"I hope we have something more to say about this sooner rather than later,'' Chilton said. Chilton didn't elaborate on the December incidents that drew the CFTC's interest. The benchmark tanker rate from the Middle East to the US Gulf Coast surged that month.

In terms of oil storage, regulators will likely focus on Cushing, Oklahoma, the delivery point for crude oil sold on the New York futures market, said Kyle Cooper, director of research at IAF Advisors in Houston. Stockpiles at Cushing amounted to 21.3 mm barrels of oil, 6.8 % of the nation's total, according to the Energy Department.
"Cushing has always been a bone of contention because of the relatively small size and the influence it has on a market as big as crude oil,'' Cooper said. "If you have a few players who have a significant influence over the market, then they have the ability to influence prices.''

Houston-based ConocoPhillips, the third-largest US oil producer, was contacted in the CFTC's investigation and has been cooperating fully, company spokesman Bill Graham said, declining to comment further.
ExxonMobil, based in Irving, Texas, also has been asked for information, company spokesman Tony Cudmore said.
"But it's our understanding that we are not the focus of the investigation,'' he said.

The CFTC reached a record $ 303 mm settlement with BP in October over allegations the London-based company manipulated the US propane market. Pierre Andurand, who runs BlueGold Capital Management, a $ 700 mm commodities hedge fund in London, said the oil market is "way too big to be manipulated.'' Prices are where they are because of a shortage of supply, not "investment flows,'' he said.
"It's obviously politically motivated,'' said Lars Steffensen, founder of Ebullio Capital Management, a $ 25 mm commodity hedge fund based in Southend-on-Sea, England. "They are shooting the messenger, that is, the speculator in this market. The futures markets are reflecting the reality that crude is in demand and there is not enough to go around.'' Steffensen said he has been trading commodities for 22 years. His fund started in January has risen about 33 %.

Investigation's cause
There had to have been something that "caught the attention'' of the commission to launch the oil-trading investigation, said Michael Haigh, head of US commodities research at Societe Generale in New York and a former CFTC economist.
"However, they may be under pressure from Congress to look at this market, given the high prices,'' Haigh said. "The CFTC doesn't want to be perceived as being asleep.'' The CFTC also said it was taking steps to improve transparency in energy markets, including more monitoring of US oil trading on InterContinental's ICE Futures Europe exchange in London.
"That's definitely an issue, and it's been a burr in the side of the CFTC for a long time,'' said Walter Zimmermann, vice president at United Energy. "You whack it on the Nymex and it pops up on the ICE.''

Trading expands
The number of traders involved in global oil markets has risen as investors seek higher returns than they can get from stocks and bonds, data from the New York Mercantile Exchange showed. Open interest in Nymex crude futures, or the number of outstanding contracts, jumped 77 % in the past threeyears to 1.35 mm contracts.
"Obviously, more accountability, more transparency is a good thing, but all this stuff about checking delivery routes -- I just don't subscribe to this whole conspiracy thing,'' said Guy Gleichmann, president of United Strategic Investors Group in Hollywood, Florida. "The speculative buying would not have come this far if they did not have a story. The supply-and-demand scenario is very tight.''

Nymex Chief Executive Officer James Newsome and his counterpart at ICE, Jeff Sprecher, said they don't see data to indicate speculators are driving up oil prices. Sprecher said ICE has had a rapid influx of commercial users trading to hedge against fluctuations in prices.
Michael Greenberger, a former head of the CFTC's Division of Trading and Markets, said the agency is likely to find that some investment banks, hedge funds and wealthy individuals manipulated futures prices. Traders may face prosecution if they reported false prices or made offsetting trades designed to manipulate the market, he said.
"There will be a lot of administrative and criminal litigation before the sun sets on this,'' said Greenberger, who teaches law at the University of Maryland.

Greenberger said that in addition to the pressure caused by consumer furore over record motor-fuel prices, the CFTC may be trying to protect its regulatory turf from the Federal Trade Commission, which has new authority to investigate energy-market manipulation.
"I think everyone is going to be watching to see how serious the CFTC is about this,'' Greenberger said. "Yesterday's take was that this is very serious.''