Goldman Sachs, BP, Enron, Iran Hype and the End of the 'Oil Printing' Scam

It appears that BP and Goldman Sachs have been literally 'printing oil'  for a decade using Enron-style commodity futures contracts, says Chris Cook, former compliance and market supervision director of the International Petroleum Exchange.

Their profit has come at the expense of other players in the oil trade: from market brokers to businesses and gas consumers. But the game is up, with only the hype over a potential war with Iran holding up a market primed to implode from falling demand.

How has this manipulation been achieved?

By means of prepay transactions: a form of financing, structured as a commodity trade, which can be made to look as if it is cash flow from operations. Investors prepay for physical oil. The producer lends oil to the investor, and the investor lends dollars to the producer. The temporary ownership rights created and sold to investors via intermediaries such as Goldman Sachs essentially enable a producer to act as a private oil bank ‘printing oil’.

How does printing oil affect the market?

In early 2009, risk averse money poured into the oil producers, allowing them demand higher prices from refiners, and thus driving forward contracts higher in a ‘super-contango’.

Traders began to buy oil, and to sell it forward, since the contango difference in price enabled them to pay to insure and finance the oil; to lease tank storage, and even to charter the fleets of tankers which sat as floating storage off the UK coast through spring and summer 2009. 

Passive investors, for their part, lose money in such a contango market, because the oil lease contracts are rolled over from month to month at a loss to them, since they would (say) sell June delivery oil contracts which they are in no position to perform, and have to buy July delivery oil contracts at a higher price. 

It is this continuing loss to long term fund investors which funds the ‘contango trade’ of the arbitrageur traders who charter the tankers.

And what does this imply for the direction of oil prices?

There have been two outflows of passive investment from the market, firstly in September 2011 when sentiment turned in favour of T-Bills as safe haven. The second was in December 2011, following the MF Global problem.

In each case we have seen the physical market go into backwardation, and in my view the record deliveries by the Saudis may be explained by an urgent desire to sell inventory returned to their ownership at high prices before the collapse they know is on the way. 

But the exit of passive investors from the market has yet to have the effect it did in late 2008 when the price collapsed to $35/barrel from the high of $147/barrel. The reason is that the current noise and rhetoric re Iran has firstly attracted refiners, who have purchased oil forward, and possibly even prepaid, because they fear prices will rise. 

This forced up the physical price of oil in the current ‘spike’ which will further kill off demand, while speculators have poured into the market to buy futures contracts, which producers have been only too happy to sell, in order to lock in high prices and insure against a collapse. 

It is only a matter of time before this spike ends as the market turns, and at this point there is literally nothing holding the market up.

Recession reality: oil demand is collapsing:

Falling demand for products in the US and EU has seen massive closures of refineries, to the extent that some 2m barrels per day of US East Coast refining capacity has closed. In a nutshell, demand in the West is dropping like a stone. In my view much of demand in the East (if not wishful thinking and hand waving by analysts) is financial, being the building of strategic reserves and refinery stocks as a physical hedge. 

It will be seen that the effect of Prepay on the oil market has been to create a parallel financial market in ‘paper oil’ which means that most participants are completely misled as to the true state of the market. 

If my analysis of the oil market is correct, many if not all prepay transactions have been terminated in recent months as passive investors have pulled out and the market has become free again of Dark Inventory. However the oil price has been kept inflated by a massive wave of speculative buying attracted by rhetoric and noise about Iran.

If he's right, it's likely the 'Big Boys' have used time bought by the Iran smokescreen to position themselves on the other side of the oil trade in anticipation of another oil price down spike. (Perhaps that was the whole idea of the media's Iran hysteria ;-)

Their timing may be tied to Greek debt insurance and a market realization that the global economy is floundering. Oil prices fell today after Iran agreed to let international nuclear inspectors into its facilities.

If oil crashes to $75 a barrel, the lower energy costs would give a shot in the arm to consumers and save the bacon of a banking system hooked on growth --however modest-- to keep kicking the financial can down the road.

All this would also enable QE'x' with lower inflation.

Who says markets are engineered?