On its last day of trade Sept. 22, the October contract for benchmark US light, sweet crudes shot up $16.37 to $120.92/bbl in the largest 1-day price jump ever on the New York Mercantile Exchange, prompting an investigation by the Commodity Futures Trading Commission.
Stephen J. Obie, acting director of CFTC's enforcement division, promised his staff would "scour" trading activity for that day in search of illegal manipulative activity. CFTC can compel testimony under oath and subpoena oil market records, including recent trading.
But some traders blamed the spike on an unidentified large oil company scrambling to cover its short positions. Analysts in the Houston office of Raymond James & Associates Inc. said, "Traders that were short oil were desperately trying to unwind positions or find physical oil before the October crude futures contract expired."
Olivier Jakob at Petromatrix, Zug, Switzerland, described it as "the largest squeeze ever" on a front-month contract. "It does raise a few question marks as to what has really happened to the West Texas Intermediate delivery mechanism," he said. Prior to the contract's expiration, he said, "Open interest was absolutely in line with previous months, so it was not the case of too large a position going into the last day of trading."
He earlier pointed out "abnormal trading patterns" of "a $4.30/bbl rally in the last 10 minutes" of the Sept. 19 NYMEX session and a $14.74/bbl difference between bottom and top intraday prices Sept. 15-19. "Open interest in WTI futures has been in a declining trend since last year," Jakob said.
The price spike surpassed the previous 1-day price-gain record of $10.75/bbl on June 6. The highest percentage rise in price in a single day was 20.9% Jan. 3, 1994. The front-month November crude contract lost $3.64/bbl over the next two sessions, then regained $2.29 to $108.02/bbl Sept. 25. It closed at $106.89/bbl Sept. 26 amid uncertainties about the international economy, the US dollar, and world demand for energy through next year. Despite strong price fluctuations over that period, the November contract for benchmark crude finished the week $4.14/bbl higher than it started.
Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke met Sept. 18 with House and Senate leaders to recommend a $700 billion capital injection to purchase bad mortgage debt from financial companies. A favorable vote was expected that week, but discussions dragged through Sept. 28 before federal officials reached a bailout agreement that would allow the US government to purchase devalued mortgage related assets from financial institutions in order to unfreeze the credit markets.
The initial bailout agreement "seemed to be a done deal until the candidates [Sen. John McCain (R-Ariz.) and Sen. Barack Obama (D-Ill.)] invited themselves to the show," said Olivier Jakob at Petromatrix, Zug, Switzerland. "The easiest way to become an overnight leader is to break a deal and then become the savior of it. The latest political debacle will not help consumer sentiment."
The agreement went to Congress on Sept. 29 for a vote. But NYMEX oil futures prices dropped more than 4% in pre-market trade that day as the US dollar gained against the euro. "The broader market remains skeptical as to whether the package will be enough to prevent the economic downturn from persisting or even spreading to other major economies, further pressuring oil prices," said Raymond James analysts.
Critics point out the plan does nothing to improve oil demand. "This plan is a rescue plan to prevent a collapse of the financial system and not a plan to boost the economy," Jakob said. "The rescue plan's impact on the economy will be a lengthy process and will not immediately put the US driver back on the road."
Meanwhile, he said, "The Washington soap opera is taking so much of traders' attention that market liquidity is coming off." Jakob said, "Open interest continues to decline to new lows for the year and soon to new lows for 2 years. All the main commodities are in a declining trend of open interest. With so much public outrage on the Wall Street bailout, we see little chance that the commodity futures market will be able to escape a regulatory change, and the more commodity prices increase, the more immediate the risk becomes."
In another sign of a troubled economy, federal regulators seized Washington Mutual Inc. (WaMu) Sept. 25 in the largest bank failure in US history. The government then agreed to sell WaMu's $307 billion in assets and $188 billion in deposits to J.P. Morgan Chase & Co.
(Online Sept. 29, 2008; author's e-mail: firstname.lastname@example.org)