PETROANALYSIS || ARTICLE
Crude Oil Speculation: Cushing’s Inventory Manipulation I
In 2008, according to the U.S. Commodity Futures Trading Commission (CFTC, 2011), Parnon Energy illegally wrought the NYMEX WTI futures contract prices. At the time, the supply of crude and WTI at the Cushing crude oil hub in Oklahoma was tight, and the WTI price was above 112 $/barrel.
The strategy comprised several actions. The first step was to accrue large amounts of crude oil to be delivered next month, although they did not have any commercial interest in the physical commodity. At the same time, they would take long WTI futures positions, trying to inflate the front-month contract prices. The idea was to give other market participants the impression that the market would remain tight, while they sold off their long positions. Next, other WTI derivatives would be sold at the current inflated prices. The cycle would be completed by surprisingly selling their crude oil physical stocks, driving WTI prices down, and increasing the value of their short financial derivatives. This perverse scheme was executed several times. The CFTC estimates that it artificially drove up the price of physical crude oil, derivatives, and other oil products. Credit problems prevented Parnon Energy from continuing the scheme.
The Accumulation of the Physical Position:
To take a dominant position in the Cushing crude oi inventories, Parnon Energy predicted the amount of crude oil in Cushing to be delivered in February to be 7 million barrels. Accordingly, it set up credit agreements to accrue 66% of these stocks, in anticipation – mid January – of their strategy. However, by the end of January, the amount of crude oil in Cushing was estimated to be only 5 million barrels. So, their holdings were dominant. At this point, with the last day of trading of the NYMEX WTI futures contract for February 2018 approaching, the company refrained from selling their dominant position, even though they held no commercial interest in the physical crude oil. This was perceived as an awkward move, because with a tight market and high prices, the market expectation was that the oil price would be lower by the end of the month, and the company would incur substantial loses by selling their physical position then.
But, as the CFTC (2011) informs, Parnon Energy had no commercial interest in the crude oil they held; they were just operating a devious scheme. They just wanted market players to believe that supply would remain tight. They also wanted to give the impression that they would not get rid of their dominant position at a loss. They accrued the long physical position aiming at surprising the market later, capitalizing on a short position. Hence, their goal was to exert upward pressure on the prices of the WTI crude to be delivered in February, by making market players believe that supply was tight.
The next steps in this market manipulation scheme, as well as the implications will be covered in the next articles.
CFTC, 2011, Civil Action, Complaint for Civil Monetary Penalties Under the Commodity Exchange Act, against Parnon Energy Inc.,