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The Associated Press reports that the Commodities Futures Trading Commission (CFTC) is investigating possible market manipulation by oil traders. The purpose is to shut down big trading bets that drive up the price of oil -- rather than follow the price discovery that results from the interaction of supply and demand. Since one source said that 60% of oil trading comes from speculators, the flow of capital into oil could fall as speculators stop their abuse. And the price of oil could drop.
The investigation went public yesterday and the CFTC appears to be examining whether investment banks are trading more than their share of contracts. As I posted, The Goldman Sachs Group (NYSE: GS) is among the investment banks taking advantage of a swaps loophole that classifies them as a commercial market participant -- like an airline -- instead of a trader. This loophole allows these banks to avoid disclosure of their bets that oil will rise.
This excess capital flowing into oil -- and against the dollar -- has driven up the price of oil. If the price of oil was set solely on supply and demand, it would surely drop. The numbers I posted here suggest that demand in the U.S. is down 300,000 barrels per day thanks to the slowdown in driving due to $4 a gallon gas.
Now if we could get Goldman and its peers to start betting heavily on a drop in oil prices and a rise in the dollar, we'd really be getting somewhere. What's good for Goldman is good for America -- or at least the top 0.1% of Americans.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Goldman Sachs securities.
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Reader Comments (Page 1 of 1)
5-30-2008 @ 10:36AM
Bellcord said...
'Gee Daddy, was this the same Goldman Sachs that was proclaiming longly and loudly just days ago that oil was going to $200 a barrel ?' The media headlined that tidbit without questioning whether Goldman had a vested interest in oil futures....whiff test...whiff test...
6-04-2008 @ 4:29AM
fred said...
?? Your argument to think that oil prices should be down is related to a slowdown in driving by US customers !
I think you dont get it : nowadays and for the first time, US is not the main driver of oil prices, what do Americains is now mainly irrelevant.
5-30-2008 @ 3:33PM
Brenda said...
You know what really bothers me most? The fact that Honda and BMW BOTH have "HYDROGEN" cars! Our dependance on Oil for transportation has been taken away with this technology (at least for consumer transportation). And yet, the prices at the pump still continue to soar. The only reason that Honda's hydrogen car (which I have to say is very sleek...four door, 100 mph top speeds) is not all over the country is because they are not being allowed to set up re-charging stations for them. Right now they are only in Southern CA - but, Honda is very innovative and are working on a re-charging system that can be done from your very own garage...regular hydrogen, the most plentiful fluid on the planet...wow, what a concept! no emmissions, just pure hydrogen being released back into the environment...I bet the Oil Companies are suicidal at the thought of this news getting out! No wonder they are trying to break us off right now...they know their opportunity to do so is limited.
6-04-2008 @ 10:11PM
Gil Fazio said...
Great Article. Speculators and traders have been driving this market to corrupt levels. Supply and demand have little impact on where this market is now. The super power brokers have colloborated over the past 5 years to hit new thresholds, just to see the breaking point of the public. Unfortunately now, the public will feel at ease when it drops to $3.50 gallon because the $4.00 threshold have already been surpassed. Our useless politicians are now attempting to intervene when it is too late. They of course are doing because of the election year. They didn't intervene before because they are counting on fatening their pockets with the oil conglomerates money.