NYMEX investigated over unusual oil prices

Federal regulators have subpoenaed recent trading records from several Nymex traders as part of a widening investigation into the sharp rise in oil prices on Monday.

The subpoenas are part of an examination announced by the Commodity Futures Trading Commission on Monday, soon after the price for an expiring futures contract on the Nymex surged in the last hour of trading, according to people briefed on the continuing investigation.

Subpoenas were also sent to New York Mercantile Exchange oil traders who were active yesterday and on Sept. 19, said the people, who didn't identify the traders and asked not to be named because the process is private.

Walter Lukken, the agency’s acting chairman, said investigators were closely monitoring the price move, which came as the financial markets were struggling to recover from the upheaval of the previous week.

Later on Monday, Mr. Lukken was briefed on the episode by Craig Donohue, the chief executive of the CME Group, which owns the Nymex, according to people who were involved in those arrangements.

The investigation is aimed at detecting any attempt to illegally manipulate the settlement price for the Nymex crude oil futures contract for October delivery, said Stephen J. Obie, acting director of the commission’s enforcement division.

As part of its investigation, the enforcement staff can compel sworn testimony and demand the production of information concerning the crude oil markets, including recent trading by specific firms.

Congress and the CFTC are watching oil markets for signs of manipulation after prices rose to a record $147.27 a barrel in July. Congress held hearings this summer on whether speculators are driving up prices, and the House of Representatives passed legislation last week that would curb speculation in commodities such as oil.

"The fact that the CEO of the CME is involved with this is a good indication of the sensitivity of the situation,'' said Craig Pirrong, director of energy markets at the University of Houston's Global Energy Management Institute. "This went all the way to the top of the CME and the CFTC.''

The crude oil contract for October delivery jumped as much as $25 a barrel — its highest one-day surge ever — before settling up 16 percent higher at $120.92.

The more actively traded November contract rose just 6.4 percent, to $109.37 a barrel.

On Tuesday, the October contract was no longer trading, and the price on the November contract fell $2.76, or 2.5 percent, to $106.61 a barrel.

The price surge took place amid very light trading. Only about 41,000 contracts for October delivery traded hands, compared with a 15-day average volume of 280,000 contracts, according to Bloomberg data.

The jump immediately caused analysts and traders to suspect that one or more traders holding short positions — bets that oil prices would fall — were scrambling to cover their bets in a rising market.

“It looks like a classical corner,” said Robert McCullough, an independent energy expert.

Some analysts said yesterday's surge in the price of the contract was the result of a "squeeze.'' In such a situation, a trader has gone short by selling contracts in the hope prices will decline. In the last days before the contract expires, the trader must buy back the same number of futures or be forced to deliver the underlying oil. When traders who are long and have contracts to sell to cover the short's position refuse to deliver, the short is forced to bid up the price to find a buyer or deliver the oil.

Commodities analysts at Goldman Sachs Group Inc. said in a note to clients yesterday that the jump in price was due to a lack of physical oil supply, countering those who say the move is evidence that limits on speculation are needed.

"This sharp move reflected extreme tightness in the prompt physical market as participants that were short oil scrambled to find physical oil before expiration,'' wrote the analysts, led by Jeffrey Currie. Record oil prices have made refiners rely on stocks of existing supply, the analysts wrote, creating "critically low'' inventory levels.

Regulators filed charges in July against a Dutch trading company, Optiver Holding, and several executives and affiliates. That complaint accused the defendants of making more than a dozen separate attempts in March 2007 to manipulate three popular contracts traded on the Nymex, including the contract involved in the current investigation.

Optiver has denied the allegations, and the case is pending.

Author: Jo Amey