The startling spike in oil prices to their highest level this year on Tuesday was caused by a rogue broker who placed a massive bet in the Brent oil market, triggering almost $10m (€7m) of losses for his company.
PVM Oil Associates, the world’s largest over-the-counter oil brokerage, said on Thursday it had been the “victim of unauthorised trading”. The privately owned company said that as a result of the unauthorised trades it had been forced to close substantial volumes of futures contracts at a loss.
Oil traders in London and New York said the “unauthorised trading” explained the exceptional spike in business activity and prices in the early hours of Tuesday that some initially thought must have been caused by a geopolitical event. “Trading volumes rose overnight and prices jumped more than $2 a barrel without apparent justification,” a senior oil trader in New York said.
Prices rose in one hour from $71 to $73.5, the highest level for the year, according to Reuters data. In total, futures contracts for more than 16m barrels of oil changed hands in that hour – equivalent to double the daily production of Saudi Arabia, the world’s largest oil producer, and far more than the traditional 500,000 barrels for that time of the day.
Traders said the broker implicated had allegedly accounted for at least half of the unusual activity, with the rest the result of others chasing the rally. Oil prices on Thursday fell to $66.5 a barrel, down almost 10 per cent from Tuesday’s peak.
This is the second episode of rogue trading in the oil market this year. In May, an oil trader at Morgan Stanley was banned by the City watchdog after he hid from his bosses potential losses on trades made under the influence of alcohol.
The incidents come as regulators are considering tougher oversight of the commodities markets after policymakers complained that speculators fuelled last year’s surge in oil and agriculture prices.
Between idiots like that broker and the folks at Goldman Sachs who have a fetish for speculation bubbles in commodities, someone gets screwed. Usually those of us who aren't movers and shakers in the wonderful world of investment banking are the ones who get it the worst. By the way, check out this paragraph from near the end of the article:
The involvement of PVM is ironic considering the company’s head, David Hufton, has been an outspoken critic of speculators in the oil market, calling some of the exchanges “electronic oil casinos”. In 2006, he said that “if futures exchanges did not exist, oil prices would be a lot lower”.
Add me to the list of outspoken critics of speculators in the oil market, if for no other reason than I can speak from personal experience as to what last year's oil bubble meant: skipped meals, juggling bills, way too much stress. Word to the wise: don't have relatives get terminally ill and require you or members of your immediate family to board the next available airplane to see them one last time, or have aging relatives freak out in the aftermath of said relative's death and insist that you drive halfway across the fricken continent to visit because they might die any second. I may seem pretty insensitive in my remarks one year hence, but then I've experienced a lifetime's worth of stress dealing with the aftermath of appeasing too many folks last year when air fares were ridiculous and gasoline and diesel prices were at historic highs (as it turned out, largely thanks to some high-priced speculators who could play God with the commodities markets from their cushy executive offices). This year, I've taken on extra work just to dig out from under enough to squeak by until next year's tax refund checks arrive. Just don't expect to read of exploits in consumerism at that point - it all gets put into savings, and now that I'm used to one to two meals a day after more or less having no choice for the last year, there's really no reason to change that particular habit (especially if it means the kids get to keep eating three squares a day). I'm guessing I'm not exactly alone among those who found themselves dealing with all manner of unwanted and unexpected expenses during last year's peak in fuel prices. I may be luckier in that I have a fairly secure job. I do share the misfortune of fellow rural denizens of being just isolated enough to where there is little choice of driving at least 10 miles to the next town with any real facilities (grocers, hospital, mechanics, veterinarians), so there's only so much that can be cut out of the driving budget (though we did successfully cut out what was possible, and again found no need to change those habits after the fuel price bubble burst last fall).