Some time ago, GATA Secretary / Treasurer Chris Powell gave a speech
titled, There are no markets anymore, just interventions. These sage words have
stuck in my head. While Mr.
Powell was specifically referencing manipulations in the precious metals markets,
I am revisiting the concept as it relates to the crude oil market. The ongoing surreptitious
“management’ of strategic commodity prices by the U.S. Government
and its agents needs to be exposed for what it really is – UNFAIR
TRADE and AN ABUSE OF PRIVILEGE.
These practices have resulted in a litany of unsustainable, unfair and
damaging outcomes in many markets with results that favor privileged insiders
at the expense of the common good.
I continue to be amazed at the lack of uptake by the media to these
over-arching issues that impact the well being and daily lives of all
citizens and media’s feeble attempts to explain the
‘unexplainable’ based on free market principles when markets are
7 months ago I published a research paper which examined the root
cause of last year’s crude oil price collapse, Oh Yes They Did!. With
the passage of time, and a little bit more poking around, I came to the
conclusion that there was a lot more mileage in the original material than
With a show of hands, how many of you out there really know how the
U.S. Strategic Petroleum Reserve [SPR] is filled anyway? Because I did not see many hands,
compliments of the Congressional Research Centre [pg. 3 of pdf doc.], I present you all with this
Congress authorized the Strategic
Petroleum Reserve (SPR) in the Energy Policy and Conservation Act (EPCA, P.L.
94-163) to help prevent a repetition of the economic dislocation caused by
the 1973-74 Arab oil embargo. The program is managed by the Department of
Energy (DOE). Physically, the SPR comprises five underground storage
facilities, hollowed out from naturally occurring salt domes in Texas
The SPR, with a capacity of 727 million barrels, currently holds roughly 692
In mid-November 2001, President Bush
ordered fill of the SPR to its current
capacity of roughly 700 million barrels, principally through oil acquired as
royalty-in-kind (RIK) for production from federal offshore leases.
This level will be attained during FY2005. However, the Bush Administration
has been periodically criticized for continuing to fill the SPR with RIK
crude as crude prices have continued to rise and be volatile……
From this document supplied by the U.S. Congress, we can see that oil
in the SPR is, by definition, referred to as royalty-in-kind [RIK] crude.
I’d like to draw everyone’s attention to the fact that the
United States Department of Energy admits,
in the notes on page 48 of their 2008 financial report, that they
“swapped” RIK crude for ‘other’ [to be delivered]
crude oil [i].
A swap of this nature requires the REMOVAL of physical crude from the SPR through pipelines.
source: U.S. Dep't of Energy
Interestingly, the U.S.
government chose not to publicly disclose that they were involved in crude
oil swaps – because their intention was to stall manically rising
prices, creating a temporary “physical glut” in the market place
- and to DRIVE CRUDE OIL PRICES DOWN. Their actions were only recorded
“buried” in foot notes of the Department of Energy’s Annual
Report where, I’m certain, they assumed no one would ever look.
This was done under the cover of [ii] and [iii] making public announcements that they were
no longer filling the reserve [net add which had been occurring continually
since 1999] and were in fact providing SPR crude to refiners in the aftermath
of Hurricane Gustav.
Here’s the intended resulting oil price collapse:
Remember folks, the result of this action produced several effects;
of crude oil in the Cushing, Oklahoma region – which produced the
tell-tale signature evidence of a lack of physical crude storage facilities.
shortage of physical crude storage facilities reverberated back through the
supply chain creating the well documented spike in Very Large Crude Carrier
[VLCC] super-tanker rates in an otherwise moribund shipping market - as
attested by the “then battered” Baltic Dry Index.
was this same criminal interference in the crude oil market which produced
the anomalous “flipping” of the historic price premium which the
higher grade West Texas Intermediate [WTI] enjoyed over Brent [North Sea]
Crude – a price inversion which remains to this day.
The Foreigners Are Learning
The rigging of markets benefits insiders and strains international
relations. The significance of this issue is now becoming clearly evident as
we are just beginning to see the empirical manifestations of these unfair dealings:
China warns banks on OTC hedge defaults -report
Sat Aug 29,
2009 9:47am IST
29 (Reuters) - Chinese state-owned
enterprises (SOEs) may unilaterally terminate derivative contracts with six foreign
banks that provide over-the-counter commodity hedging services, a leading
financial magazine said.
regulator, the State-owned Assets Supervision and Administration Commission
(SASAC), had told the financial institutions that SOEs reserved the right to
default on contracts, Caijing magazine quoted an unnamed industry source as
It did not name the banks or the firms in
question, but said Keith Noyes, an official with the International Swaps and
Derivatives Association, had confirmed he was aware of the letter to the
banks. He declined to comment further to Caijing.
It also cited
a SASAC official as saying that almost every SOE involved in foreign exchange
or trade had some exposure to derivatives such as crude oil, non-ferrous metals,
agricultural commodities, iron ore and coal, although only 31 SOEs were
licensed to do so.
SASAC was immediately available to comment on Saturday.
over the job of overseeing SOEs' derivatives trading from the securities
regulator in February after several Chinese firms reported huge losses from
derivatives, and quickly tightened the rules, ordering firms to quit risky
contracts and report their positions on a quarterly basis.
Air China (601111.SS: Quote, Profile, Research) (0753.HK: Quote, Profile, Research), Shanghai Airlines (600591.SS: Quote, Profile, Research) and China Eastern (600115.SS: Quote, Profile, Research) reported book losses of almost $2 billion on
aviation fuel hedging contracts, the official Xinhua news agency said at the
China is but one example whose voice, as America’s largest
creditor, cannot be ignored.
Their recognition of ponzi-paper markets has led to their repudiation
of the market rigging game. The
unspoken, yet imminent, extension of this logic is ultimately the repudiation
of U.S. Dollar hegemony, as all strategic commodities currently settle in
U.S. Dollars. A failure on this
level would have catastrophic implications with America being unable to
conduct international trade.
Additionally, unilateral termination of losing derivatives positions
could precipitate a seismic paper avalanche that could overwhelm the global
Additional tell-tale signs of possible, systemic financial
dislocations will be covered in the next few days in a special
subscriber’s report analyzing Barrick Gold’s apparent
capitulation and announced intention to cover all existing gold hedges [in
the next 12 months] still on their books.
In closing, I re-present this to you in greater detail now because
– when the article was first published 7 months ago – there were
some that said, “the oil price collapse may have been caused by a
release of crude from the SPR”.
Ladies and gentlemen, the notion that the oil price collapse
“may have been caused” by a secretive release of crude from the
SPR is as debatable as the notion that the sun “may have risen
For the record, both are indisputable, documented, historic facts.
Invest wisely and understand who and what you’re dealing with
and remember, there’s no such thing as the perfect crime.
articles by Rob Kirby
Kirbyanalytics.com are profiting from paid in-depth research reports, analysis
and commentary on rapidly unfolding economic developments. Subscribe here.