Commodities Conspiracy?
Citigroup energy trader Andrew J. Hall is renowned for his art collection, his poor taste in garden sculptures and a penchant for practising callisthenics with a personal ballet tutor. Lately, however, this enigmatic British-born trader who runs Citi’s US Phibro subsidiary – has been embroiled in a public row over the payment of a $100m bonus. That, in turn, has led to questions about how traders like Hall make their cash by betting big on the movement of prices.
The conspiracy theories are flying. Could the bubble in commodity and oil prices have been caused by a conspiracy of traders, speculators and investment banks? And, with prices rising strongly again, are we in for a repeat performance?
We’ve always been sceptical of the market manipulation idea – mainly because the sheer size of the world oil market means that it’s impossible to ‘corner’. Yet some of Phibro’s activities give pause for thought. As The New York Times reveals, the company often wagers that the price of oil will rise so quickly that it can make money by storing oil in chartered supertankers until the price goes up.
In theory, we might say this doesn’t matter: a speculator buying up oil when prices are cheap and then selling it when there’s a shortage can actually even out prices. But this isn’t an economics workshop. Citi’s $100 Million Man bought oil and kept it off the market. When you consider the threat of regional bottle necks or – worse – the possibility that total supply could fail because speculators are tying up tankers, its doesn’t look good.
Regulators seem to agree. The US Commodity Futures Trading Commission (CFTC) will shortly release a report showing speculators played a significant roles in driving wild swings in oil prices - a move bound to intensify scrutiny on investors. Other watchdogs are falling into line. In Britain, the FSA has always downplayed the role of speculators. But – following warnings from Gordon Brown and Nicolas Sarkozy on the need to curb dangerously volatile oil prices – it has met with oil brokers, banks and hedge funds to review regulation.
More transparency might help, but a witchhunt for speculators won’t do much to alleviate price volatility, which is mainly down to the availability, of easy money. Plenty of factors affect the oil price, concluded mason, not least supply and demand; and most studies show that speculation causes only small swings. Yet it is worth discovering how this high-risk, high gains trading game is played – and the role it had in creating such a spectacular price bubble.