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FSA joins western watchdogs in search for oil price rigging

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FSA joins western watchdogs in search for oil price rigging

· Futures market traders required to report daily 
· Sharp correction due this year, analysts report

Oil prices ended a volatile week almost $10 below their record $135 levels as the Financial Services Authority joined a worldwide investigation into the price manipulation of crude.

The City’s financial watchdog formally joined forces with the US Commodity Futures Trading Commission this week to look into whether the oil market is being illegally rigged. The CFTC, the FSA and ICE Futures Europe will require traders to provide daily information on positions they have taken in the oil futures market.

The FSA also admitted that they had been passing information on to the CFTC since 2006 “to assist in the detection of the potential abuses or manipulative trading practices that involve trading in related contracts on UK and US derivative exchanges”.

This news came as a number of analysts voiced their concerns over oil prices, which rose above $135 a barrel for the first time last week.

Oil is heading for a sharp correction, according to analysts at Lehman Brothers, who liken the spiralling price to the dotcom boom and bust of 2001.

In the report, Oil Dotcom, Lehman’s Michael Waldron says the correction could come as early as September: “We think that the crude oil market should turn and we think it will happen by the end of the year.”

The report predicts that Brent crude, which stands at $128 a barrel, could fall to $90 a barrel by the first quarter of 2009. But Waldron believes that the price will go up again before it goes down, partly because of “bullish headlines”. Other factors likely to drive the price higher this summer include the hurricane season and increased demand from China as it rebuilds after the devastating earthquake.

“As in the dotcom period, when ‘new economy’ stocks became popular, a growing number of Wall Street analysts have repeatedly raised their forecasts each time oil prices have risen,” the report said. “These revised forecasts have been partially responsible for new investor flows, driving prompt and forward prices to perhaps unsustainable levels.”

On a rollercoaster day in the energy markets, US crude fell 77 cents to $125.85 a barrel and London Brent dipped 49 cents to $126.40 in early trading as soaring prices reduced demand for petrol and a stronger dollar lowered the attraction of commodities as a currency hedge.

Later, however, US light crude was up 62 cents at $127.24 a barrel, trading from $124.67 to $128.30. Brent crude was up $1.11 at $128 a barrel, trading from $125 to $129 as the dollar fell to session lows against the euro.

“It’s been a volatile period and we’re just seeing more of that, and there can be exuberant buying or selling depending on the moment,” said John Kilduff at MF Global.

The Energy Information Administration said this week that demand in the US for oil in March fell to its lowest level for that month in five years, the latest signal that consumers are struggling to cope with high prices.

“A rebound in the dollar, speculation about US interest rate hikes and the announcement by the CFTC of measures to enhance the oversight of energy futures markets may be seen as potentially stemming future investment flows into energy and other commodities,” said Antoine Halff of Newedge USA.

“Good news seems to come in twos,” said a spokesman for the AA. “Not only are oil prices falling, but the two refineries that had problems are coming back into action very soon,” he said, referring to Grangemouth in Scotland and Porvoo in Finland.

“The fall will not register at the pumps immediately but we’re keeping our fingers crossed that increased production will hopefully bring down prices.”

http://www.guardian.co.uk/business/2008/may/31/oil.stockmarkets

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