WSJ Article on Oil Supply Data Probed for Manipulation

I am wondering to what extent the an investigation into oil-supply data manipulation would disrupt oil-futures trading enough to encourage increased transparency, or if the timing of the probe is not good since the summer has ended and prices are rebounding from the summer high.



Oil-Supply Data Probed for Manipulation
CFTC Regulators Look at Energy Firms, Take Depositions About Oddball Trading
By ANN DAVISSeptember 4, 2008; Page C1
Commodity-market regulators are investigating whether energy-market players are injecting false data into the marketplace to influence perceptions about crude-oil supply and demand, people familiar with the probe say.
Among other things, regulators are concerned that companies may be reporting inventory levels that benefit their own trading positions but that may not be accurate, people familiar with the regulators' thinking say.
Unexpected drops in oil inventories reported each Wednesday by the U.S. Energy Information Administration can spark price spikes on the main oil futures benchmark on the New York Mercantile Exchange. A company could theoretically underreport barrels in its tanks, for example, at a key hub to suggest oil is scarcer than it really is, and then sell its physical oil at a premium when oil prices jump on misleading news.
Another concern is whether companies conduct some physical oil sales and purchases solely to influence short-term pricing on oil futures markets.
It isn't clear whether the regulators, at the Commodity Futures Trading Commission, have certain energy firms in their sights. But people familiar with the agency's operations say its concerns stem from tips from sources in the oil-trading world about big market moves that occurred unexpectedly.
The CFTC is taking depositions, or testimony, about some of those periods, lawyers say.
The agency has become more active in soliciting and acting on leads from traders and experts in physical energy handling, according to people familiar with the CFTC's operations.
Among the periods the agency is examining, these people say, is a rapid shift in the structure of oil markets in July 2007. Price relationships flipped in a way that was extremely profitable for traders who may have had close knowledge of continuing and rapid drain-off in oil inventories. Oil for near-term delivery had been selling at a discount to oil to be delivered months and years into the future. Suddenly, oil for immediate delivery became much more expensive when a glut of oil at a key hub at Cushing, Okla. rapidly drained.
An agency spokeswoman said, "The CFTC has already announced one enforcement action [in July 2008] in the crude oil markets that resulted from the agency's nationwide crude oil investigation, and these investigative efforts are ongoing. Ensuring the integrity of the futures markets is critical, particularly in the energy sector given the impact energy prices have on all consumers."
It is illegal to report false data to the EIA. One issue is how much the EIA vets the information it receives; the CFTC is interested in doing more thorough examinations of inventory data that it suspects may be inaccurate. Jonathan Cogan, spokesman for EIA, says while the EIA doesn't do physical inventory checks to audit the accuracy of the reported numbers, the agency looks at other data on supply and demand to determine if the inventory data appears on target.
The CFTC's probe about data integrity is part of a longer-term oil markets investigation as well as a broader effort by the CFTC to improve its information about and its understanding of the workings of the energy markets it regulates.
Pressure on the CFTC to exert more aggressive oversight has mounted lately as Congress has debated whether to require the agency to take new steps to curb abuses or study the impact of speculation on the market. Several lawmakers have criticized the agency for lax regulation.
The CFTC recently hired outside consultants to help it dive into the ins and outs of physical oil shipping and terminals. They are hosting intensive boot camps for its enforcement attorneys to give them a road map of who owns key infrastructure and how they use it. The idea is to better grasp where, if a trader wanted to manipulate prices, the markets might be vulnerable.
The latest requests for information in the oil-market probe could help the enforcement staff build an encyclopedic database of who's who in the oil-trading world. It is loading emails and trading data onto a digitized platform, according to people familiar with its demands.
Long Arm of the CFTC
The CFTC sent out a new wave of broad information requests a few weeks ago to large oil traders, including Wall Street firms, energy companies and physical-oil merchants, after sending an earlier set of inquiries this spring, people involved in the cases say. It is seeking the names of the firms' biggest traders and their email and instant-message correspondence about the oil markets dating back to early 2007, or in some cases back to 2005. It has also asked about storage holdings, among other physical assets the traders may own or control.
Some people who have seen the requests characterize them as overly broad. Among other queries, the CFTC asked some recipients to disclose any unfair, improper, unethical and unlawful practices, they say.
The requests follow more-targeted subpoenas issued last fall about trading in refined oil products and other subpoenas in December, inquiring about transactions on a widely used energy price-reporting system run by Platts, a unit of McGraw-Hill Cos. "Platts has full confidence in the integrity of our price assessment processes, which are designed to bring transparency and efficiency to the marketplace." says a company spokeswoman.
The agency previously settled civil charges against a unit of Marathon Oil Corp. alleging that company attempted to manipulate the cash price of crude oil through bidding activity on Platts. The Marathon unit didn't admit or deny wrongdoing. The CFTC is continuing to aggressively pursue any misleading reporting to Platts, people involved in the matters say.
The lines of inquiry in the CFTC oil probe have clear parallels to a series of successful cases it has prosecuted over the past several years against natural-gas traders who reported false data to industry trade publications and price-reporting services including Platts. Those cases have resulted in several civil settlements, and recently criminal sentences for some defendants.
The CFTC is seeking to obtain data from the EIA about what various companies report and that the EIA uses to compile its widely watched weekly energy inventory estimates. Traders the world over watch the data as an important barometer of energy supply, since the data the U.S. publish are far more robust than in many other nations.
EIA's Explanation
The EIA says while it has shared data with the CTFC in the past, it doesn't provide an entire data feed for an open-ended time frame. Mr. Cogan, spokesman for EIA, says, "The reason why this data is protected at the individual level is ... that in order to get truthful, accurate, timely reporting of data -- which is data that competitors would find useful -- we try to ensure that that data is not available at the company level. That way companies will feel they can accurately report to us. It will benefit the whole market with better information."
Enforcement attorneys also have been pursuing a theory that some traders have leased oil tankers as floating storage to make oil inventories on the ground appear less-well supplied than they really are, say attorneys familiar with its inquiries.
Skeptics of the theory argue that the largest crude-oil tankers are small in context of hundreds of millions of barrels of total U.S. oil inventories. They are extremely expensive to lease and holding that much oil in storage is also capital-intensive, so any scheme to hold oil off the market would be risky.
Write to Ann Davis at ann.davis@wsj.com1