Today’s Record Nymex Oil Price Jump – Is It a Manipulative Squeeze?

Michael Giberson

On the last day of trading for NYMEX’s October contract for crude oil prices jumped a record $16.37/barrel to close at $120.92/barrel. To some observers, the sharp movement on the last day of trading suggests a classic manipulative squeeze. From Bloomberg:

“This looks like a squeeze play,” said Phil Flynn, senior trader at Alaron Trading Corp. in Chicago. “All of the contracts are up, but nothing like October. This is the last day of trading and someone is scrambling to guarantee supply.”

… In a squeeze a trader has gone short by selling contracts hoping the price will decline. In the last days before the contract expires the trader must buy back the same number of futures or be forced to deliver the underlying oil.

“I don’t think there’s any doubt that’s the indication of a huge squeeze,” said Craig Pirrong, director of energy markets for the University of Houston’s Global Energy Management Institute. “It’s just stunning this could happen” given the recent scrutiny in Congress and among U.S. regulators concerning the crude oil markets, he said.

Pirrong elaborates at Streetwise Professor:

It sure does look like a squeeze… On Friday, October settled $1.80 over November. At some point today, October traded at least $19.55 over November. Based on settlement prices, October gained $9.45 on November. That last number is a huge move, given the normal volatility in calendar spreads, but the $17.75 move is mind-blowing.

A squeeze would work by somebody holding a large long position refusing to liquidate that entire position. On the last trading day, refusing to liquidate is equivalent to demanding delivery. If the shorts perceive that deliverable supplies are inadequate to meet the long’s implied demand for deliveries, they are willing to bid up the price in order to offset their positions and avoid the prospect of making inefficient deliveries.

Pirrong said given the current scrutiny that energy futures markets are subject to, he would have thought that players in the market would “go out of their way to avoid doing anything even remotely manipulative.” Perhaps not. Expect congressional hearings, a CFTC investigation, perhaps the Justice department will get involved. (UPDATE: Bloomberg on CFTC , and a CFTC press release.)

An alternative hypothesis, which I have come up with in the last ten minutes without much consideration of the evidence at hand, is that the oil market may have been squeezed by an “invisible hand.” (So caveat lector.)

In less interesting times than these, I would suppose that among both “longs” and “shorts” trading in a commodity contract nearing expiration, some will be bullish and others bearish. The diversity of opinions lends relative stability to the market. Instead of an intentional attempt to squeeze the market, my half-baked hypothesis is that the substantial accumulation of news over the last few days may have worked to coordinate sentiment among longs and shorts in such a ways as to produce a sharp upward price move.

As the Bloomberg story points out, many commodities traded higher today (not just crude oil) as the dollar dropped, suggesting a “flight to quality” while the effects of the Bush Administration’s proposed $700 bailout plan are worked out. In addition, the effects of hurricanes Gustav and Ike on domestic U.S. oil production may have led the oil “shorts” to worry about their ability to find oil to deliver during October, and therefore more willing to cover their position at higher prices today.

[As suggested in this quote via MarketWatch:

“The stocks at Cushing [Okla.], which is the delivery point for Nymex, will be low because they have been drawn down because of the hurricane,” said James Williams, an economist at WTRG Economics. “If you are short on the last day of trading you have to either buy back the contract or make physical delivery and it is probably difficult to get spot oil at Cushing to make physical delivery.”]

It is unusual for commodity markets to be presented so much news of such significance all at once, all pointing in the same direction, on the last day of trading for a futures commodity contract. This unusual confluence of significant news may have been enough to coordinate a squeeze by the invisible hand of the market.

We will learn more from the inevitable investigations. It certainly is “interesting times” in energy markets.

2 thoughts on “Today’s Record Nymex Oil Price Jump – Is It a Manipulative Squeeze?

  1. Have to disagree with your conjecture on this one, Michael. Bailout issues, dollar worries, etc., can explain movements in the overall WTI curve, Brent, gasoline, heating oil, etc. That’s why a $6 move in November, or in Brent, though large, is comprehensible. It is very difficult to construct a story whereby these factors would have such a disproportionate effect on the just-expiring October WTI contract. The spread move between October and November is huge. Beyond belief huge. The narrowing of the crack spread is also unprecedented. The combination of expiration of a relatively large open interest and the Ike-related delivery supply problems your link mentions make market power–a squeeze–the most likely explanation for what is going on here.

  2. I’m not sure that I agree with my conjecture myself, just thinking “out loud.” Still, I can imagine that traders faced with doing something about the October contract expiring today might feel some urgency in trying to resolve their positions, and that urgency could explain an October move that was more than double the November move. At the rate that new news is coming into the market, November is a long time away.

    It is possible that some combination of planning and circumstance provided some one or some group with market power, which they intentionally chose to exercise via a squeeze. My counter idea was that maybe it was just circumstance that made the squeeze, without anyone intending to exercise market power.

    At least in principle I think that the CFTC has access to enough information to distinguish between the two explanations.

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