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U.S. Probes Crude Oil Trading for Price Manipulation (Update3)

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U.S. Probes Crude Oil Trading for Price Manipulation (Update3) 

By Matthew Leising and Alexander Kwiatkowski

May 30 (Bloomberg) — The U.S.Commodity Futures Trading Commission, the watchdog for commodity transactions, is investigating U.S. crude oil trading to determine whether the surge to record prices is the result of manipulation or fraud.

The CFTC has been investigating the transportation, storage and trading of crude oil in the U.S. since December, it said in a statement posted on its Web site yesterday. The probe includes oil futures contracts, which have soared as much as 40 percent this year to a record above $135 a barrel.

“It’s unprecedented for the CFTC to say that they are in the midst of an investigation.” Michael Haigh, head of U.S. commodities research in New York at Societe Generale SA, and a former CFTC associate chief economist, said in an interview. “They may be under pressure from Congress to look at this market given the high prices.”

U.S. crude rose as high as $135.09 a barrel on the New York Mercantile Exchange on May 22. Brent crude oil, the main contract on Intercontinental Exchange Inc.‘s London market, climbed to $135.14 the same day. Record prices have led some analysts and the producer group OPEC to claim that the market is driven by speculation rather than the demand and supply of oil.

Confidential

“The Commission is taking the extraordinary step of disclosing this investigation because of today’s unprecedented market conditions,” CFTC Acting Chairman Walt Lukken said in the statement. The Washington-based regulator, which generally keeps its inquiries confidential, didn’t say when the probe will end and didn’t name any companies being targeted. The details of the investigation were confidential, it added.

In the same week that crude prices touched records above $135, the number of outstanding futures contracts on Nymex, known as open interest, fell. This suggested some traders were buying contracts to cover wrong-way bets based on speculation that prices would decline, analysts said. Falling open interest coinciding with rising prices are signs that traders are buying to exit so-called short positions.

Concurrent with the investigation, the commission said it was taking measures to improve transparency in energy market trading, including greater monitoring of U.S. crude oil trading on Intercontinental’s ICE Futures Europe exchange in London.

Lip Service

“The CFTC is paying lip service to congress by having to be seen to be investigating speculation,” said Rob Laughlin, senior broker at MF Global Ltd. in London. “They will spend months, and quite possibly millions of dollars, to find nothing. The reality is now there are thousands more participants trading oil, and oil contracts, especially since electronic trading has become the norm.”

The CFTC said it has reached an agreement with the U.K.’s Financial Services Authority and ICE to expand surveillance on the London exchange, where all transactions are made electronically. ICE Futures offers trading in U.S. West Texas Intermediate crude oil futures contracts, the grade that sets prices within the U.S., and its flagship North Sea crude, Brent.

The agreement with the FSA “will enhance the amount and quality of the information the CFTC receives regarding crude oil trading in the U.K. and will enhance the agency’s already vigorous surveillance activity,” according to the statement.

Large Positions

Nymex has about 75 percent of the open interest, or outstanding contracts, in U.S. WTI crude oil futures and ICE Futures Europe has the remaining 25 percent, the CFTC said.

Under the agreement, the FSA and ICE will provide the U.S. regulator with information about daily large trader positions in the WTI contract on the U.K. exchange. Information will pertain to all contract months traded, as opposed to just near-term contracts, the statement said.

The FSA and ICE have also agreed to give the CFTC more information about traders and to provide trading data in a format that is easier to monitor. ICE Futures Europe will also notify the CFTC when traders “exceed position accountability levels,” the statement said.

The FSA is “committed to working closely with the CFTC to address and mitigate risk” of manipulation, said FSA spokeswoman Teresa La Thangue. The U.K. body regularly shares information with the CFTC “to assist in the detection of potential abuse and manipulation that relate to contracts on the U.S. and U.K. derivatives exchanges,” she said by phone from London today. She declined to comment on the CFTC investigation.

Not Justified

During testimonies to Congress last week, oil executives said that while limited access to foreign resources and rising industry costs have helped push prices higher, the current level isn’t justified by oil market fundamentals.

The price of oil should be “somewhere between $35 and $65 a barrel,” John Hofmeister, president of Shell Oil Co., the Houston-based subsidiary of Royal Dutch Shell Plc, said at a Senate hearing on May 21. John Lowe, executive vice president of ConocoPhillips, said oil should be “about $90 a barrel in this environment.”

The CFTC said it is also trying to improve the information it gets about index-based trading on energy futures markets so it can determine the influence this “relatively new” type of trading has on prices.

Commodity index futures such as the Reuters/Jefferies CRB Index include crude oil futures and other energy components.

The regulator will require traders to give monthly reports about their index-based trading and it plans further reviews of how these traders are classified, how they report their trading activity and how they behave, according to the statement.

To contact the reporters on this story: Matthew Leising in New York at[email protected]Alexander Kwiatkowski in London at[email protected]

Last Updated: May 30, 2008 11:21 EDT

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