Monday, June 2, 2008

1) Government investigates oil markets

Agency looks for fraud and price manipulation in crude-oil markets; crude has soared 42% since December.

Last Updated: May 30, 2008: 8:07 AM EDT

WASHINGTON (AP) -- Federal regulators are six months into a wide-ranging investigation of U.S. oil markets, with a focus on possible price manipulation.

The Commodity Futures Trading Commission on Thursday said it started the probe in December and took the unusual step of publicizing it "because of today's unprecedented market conditions."

Crude prices, which on Thursday hovered around $127 a barrel, have risen more than 42% since early December. Gasoline prices are nearing a national average of $4 a gallon, up from about $3.20 a year ago.

The commission said it is investigating potential abuses in the way crude oil is purchased, shipped, stored and traded nationwide, but did not reveal details. Also on Thursday the agency announced a handful of other initiatives designed to increase transparency of U.S. and international energy futures markets.

For example, the CFTC said it will immediately require monthly reports from institutional investors who manage funds designed to mimic the price of crude oil and other energy futures. The goal, the agency said, is to identify the amount of such index trading and to "ensure that this type of trading activity is not adversely impacting the price discovery process."

The CFTC also said it has reached an agreement with its British counterpart and InterContinental Exchange Inc.'s Futures Europe to expand surveillance of energy futures contracts with U.S. delivery points, including the benchmark West Texas Intermediate crude, which trades on the New York Mercantile Exchange.

"The implementation of today's measures will improve oversight of the energy futures markets to ensure they reflect fundamental economic forces of supply and demand, free of manipulation and fraud," the CFTC said in a statement.

Analysts said the CFTC action would likely have a limited impact on oil prices, which have risen on a combination of factors, including growing demand in China and other developed nations, the falling value of the dollar, geopolitical tensions and low interest rates, which have fueled a futures buying binge by institutional investors seeking to ride oil's upward momentum.

It is the last factor, exacerbated by the Federal Reserve's efforts to prop up the ailing housing market, that is playing the biggest role in the recent runup, according to Howard Simons, a strategist at Bianco Research in Chicago.

"Eliminate that excess money and the problem (of soaring prices) disappears," he said. Still, the CFTC action "will have a chilling effect" on speculative investors' enthusiasm for energy futures, Simons predicted. "What they're saying ... is, 'You either stop this or we're going to stop it for you."'

At least one energy analyst sees trouble on the horizon for pension funds and other non-traditional investors looking to commodities indexes as just another type of security they need to have in their portfolios. If a major price drop occurs, this relatively new breed of investors will want out of energy futures at the same time and it will be "like entering a revolving door at the wrong time in the wrong direction," according to Cameron Hanover Inc. President Peter Beutel.

U.S. Sen. Jeff Bingaman, chairman of Senate Energy and Natural Resources Committee, earlier this week asked the CFTC to provide the committee with more information about its oversight of energy commodity markets.

The New Mexico Democrat said he was concerned about increasing trading activity in U.S. crude oil taking place overseas and in over-the-counter markets. He also questioned the CFTC practice of classifying so-called "swap dealers," including large investment banks, as "commercial" market participants alongside traditional buyers and sellers, such as oil companies and airlines.

"The practice of including investment banks in the commercial participant category calls into question the CFTC's continued assertion that noncommercial participants, or speculators, follow rather than lead oil price movements," Bingaman wrote in a letter Tuesday.

Congress earlier this month voted to give the CFTC greater oversight of unregulated electronic exchanges, such as ICE, as a way to protect consumers and deter price distortion and manipulation.

A Senate subcommittee investigation last year found that hedge fund Amaranth Advisors LLC, which collapsed in 2006 after losing more than $6 billion in natural-gas trades, had shifted its activities to ICE from the regulated Nymex to avoid trading limits, and that the "excessive speculation" raised homeowners' heating bills.

Speculation has been cited as one on many factors contributing to surging petroleum prices, along with assumptions about new supplies, limited demand growth, possible supply disruptions overseas and the dollar's depressed value against other currencies.

U.S. Economy
The U.S. Commerce Department said that personal incomes were up .2% in April while consumer spending was also up .2%, as expected. In March, personal incomes were revised up from .3% to .4%.

In the same report, the core rate of personal consumption expenditures, an inflation gauge, was up just .1% in April and up 2.1% from a year ago. The March eurodollars ended up .045 at 96.675.

The University of Michigan's index of consumer sentiment fell from 62.6 to 59.8 in May, the lowest in 28 years, but also up slightly from the estimate earlier this month.

The Chicago purchasing managers' index increased from 48.3 to 49.1 in May, better than expected.

Grains
The USDA said that, as of last week, 2007-2008 exports of:
Corn slipped from up 15% to up 14% from a year ago.
Soybeans improved from down 2% to down 1% from a year ago.
Wheat slipped from up 42% to up 41% from a year ago with one week remaining.
Cotton slipped from up 21% to up 20% from a year ago.

In an effort to compromise, Argentina's government slightly reduced the maximum tax rate on grain exports, but farmers remain on strike, angry that more relief isn't being provided. July soybeans closed up 40.75 cents at $1363.50.

December corn closed up 17 cents at $6.265 with ongoing concerns about wet conditions in the U.S. hindering the development of the corn crop.

Livestock
After the close, the USDA estimated this week's beef production at 474.8 million pounds, up 3.0% from a year ago. Pork production was estimated at 366.7 million pounds, up 5.8% from a year ago. August lean hogs closed up 1.57 at 78.97, the highest close in nearly three weeks. August cattle closed up .92 at a new contract high of 101.85.

Metals
London inventories of copper were down 1,450 tons to 124,950 tons today. That is down from 197,450 tons at the start of the year. July copper closed up 4.75 cents at $3.6060.

August gold closed up $9.80 at $891.50, taking back part of yesterday's big loss.

Energies
July crude oil closed up .73 at $127.35 in a relatively quiet session after yesterday's big drop. Yesterday morning, the Department of Energy said that U.S. crude supplies were down 8.8 million barrels last week.

Currencies
Statistics Canada said that real GDP was down .1% in the first quarter, but up 1.7% from a year ago, weaker than expected. It was the weakest performance in over four years. The June Canadian dollar closed down .0060 at $1.0051.

Eurostat said that the unemployment rate for the Euro area 15 remained at 7.1% in April. They also estimated that consumer prices were up 3.6% in May from a year ago, up from a 3.3% gain in April. The June euro was up .0049 at $1.5546.

Japan's Statistics Bureau said that consumer prices were down .1% in April, but up .8% from a year ago. The unemployment rate increased from 3.8% to 4.0% in April and household spending fell 2.7% in April from a year ago. The June yen ended up .0008 at .9491.

Real GDP in India was up 8.8% in the first quarter from a year ago, the same as in the fourth quarter of 2007

David Zwebner, CEO
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