More Whirled in Oil

‘Rogue broker’ blamed for oil spike

By Javier Blas and Izabella Kaminska in London FT

Published: July 2 2009 12:07 | Last updated: July 2 2009 20:26

The startling spike in oil prices to their highest level this year on Tuesday was caused by a rogue broker who placed a massive bet in the Brent oil market, triggering almost $10m (€7m) of losses for his company.

PVM Oil Associates, the world’s largest over-the-counter oil brokerage, said on Thursday it had been the “victim of unauthorised trading”. The privately owned company said that as a result of the unauthorised trades it had been forced to close substantial volumes of futures contracts at a loss.

London-based PVM said it had informed the Financial Services Authority, the UK regulator. But officials at the Commodity Futures Trading Commission, the US regulator, claimed they had been kept in the dark for several hours in spite of an agreement between the watchdogs last year to exchange such market-sensitive information spontaneously.

Oil traders in London and New York said the “unauthorised trading” explained the exceptional spike in business activity and prices in the early hours of Tuesday that some initially thought must have been caused by a geopolitical event. “Trading volumes rose overnight and prices jumped more than $2 a barrel without apparent justification,” a senior oil trader in New York said.

Prices rose in one hour from $71 to $73.5, the highest level for the year, according to Reuters data. In total, futures contracts for more than 16m barrels of oil changed hands in that hour – equivalent to double the daily production of Saudi Arabia, the world’s largest oil producer, and far more than the traditional 500,000 barrels for that time of the day.

Traders said the broker implicated had allegedly accounted for at least half of the unusual activity, with the rest the result of others chasing the rally. Oil prices on Thursday fell to $66.5 a barrel, down almost 10 per cent from Tuesday’s peak.

The Financial Times has identified the PVM broker as Steve Perkins. PVM declined to comment and Mr Perkins could not be reached. Fellow traders said Mr Perkins was considered an experienced broker, well-regarded in the market.

This is the second episode of rogue trading in the oil market this year. In May, an oil trader at Morgan Stanley was banned by the City watchdog after he hid from his bosses potential losses on trades made under the influence of alcohol.

The incidents come as regulators are considering tougher oversight of the commodities markets after policymakers complained that speculators fuelled last year’s surge in oil and agriculture prices.

The involvement of PVM is ironic considering the company’s head, David Hufton, has been an outspoken critic of speculators in the oil market, calling some of the exchanges “electronic oil casinos”. In 2006, he said that “if futures exchanges did not exist, oil prices would be a lot lower”.

The $10m loss is a heavy blow for PVM, which reported profits of just $5.6m in the year to July 2008, according to its accounts.

Additional reporting by Brooke Masters

Is The Bubble About to Burst?

Fed Injects $198 Billion Into System

Spectacular Acts Of Central Banking
Paul Maidment, 08.09.07, 9:11 PM ET Forbes

The frenzied plea of money manager turned TV markets maniac Jim Cramer to the Federal Reserve to “open the window” – i.e., pump liquidity into the banking system to forestall a credit crunch – seems to have been heard.

And it was heard as far away as Europe. Not that surprising, as Cramer was shouting loud enough.

On Thursday, the European Central Bank stunned investors by pumping $130 billion into the banking system via a tender offer taken up by 49 banks, making the Fed's action later on look modest by comparison. It injected $24 billion via overnight and 14-day repos during Thursday morning trading.

In truth, the central banks were listening more to the silent evaporation of liquidity from the inter-bank market than to Cramer, whose hysterical performance has been immortalized on YouTube. The ECB's action followed a sharp rise in overnight interest rates to 4.7%. Its target rate is 4%. In the U.S., overnight rates topped 5.75%. The federal funds target rate is 5.25%.

On both continents, the credit crunch has been caused by fears about securities related to U.S subprime mortgages that have become difficult to price in illiquid markets, and as a result, make it near impossible for investors to asses how much exposure funds and institutions have to subprime markets.

In such "who-the-hell-knows" conditions, equity, fixed income and foreign-exchange markets, all linked by a web of derivatives, become as volatile as we have seen in recent weeks. Only commodity markets seem immune.

The ECB's intervention was not far short of what it did in the two days following the 9/11 attacks on New York and Washington, D.C., in 2001. And it was 10 times the size of a typical ECB intervention, compared with the Fed's twice normal.

The relative scale of the two central banks actions prompts two thoughts. One should calm investors' jitters, if not the other.

The first is that the Fed believes that U.S. credit markets are still functioning adequately, if somewhat creakily, and that there is no crisis at hand. That is consistent with its comments just two days earlier when the Fed's interest rate-setting committee met, after which the Fed said nothing to suggest that the increasing number of banks and funds 'fessing up to subprime woes posed any sort of systemic risk to the financial system.

The second, as some commercial bankers have publicly acknowledged, is that the ECB pulled off a spectacular act of central banking by dint of the very scale of its intervention, pushing overnight rates back down to 4.1%.

But there is a second thought to that second thought. In taking such sweeping action, the ECB may have sent a signal to investors that there could be worse still to come, that the BNP Paribas (other-otc: BNPQY - news - people ) scare is only the tip of an iceberg. And that the ECB may know more that it is letting on. So, too, may the 49 banks who took its $130 billion on Thursday.

Unknown unknowns, to borrow former U.S. Defense Secretary Donald Rumsfeld's parlance, scare investors like nothing else.

And from the BBC

Are global market bubbles set to blow?
Analysis
By Ben Richardson
Business reporter, BBC News

How can you tell the difference between a boom and a bubble?
There is a strange fascination in blowing a bubble, when despite your better judgement, you keep willing it to get bigger regardless of the dangers.
Then, suddenly, the violent pop that leaves you picking bubblegum off your eyebrows, or crying soapy tears.

For many observers, global markets are getting dangerously close to such a bursting point.

Until recently, we have been living in a period of low global interest rates that have let consumers and companies borrow money cheaply.

That has driven demand for mortgages, let companies pay increasingly large sums for takeovers, and allowed consumers to spend freely.

And the results of this credit splurge are hard to ignore:


UK house prices have doubled in the past 10 years.
China's main stock index has quadrupled in value since the start of 2006.
The UK's FTSE 100 and US S&P 500 stock indexes are at levels not seen in almost seven years.
Commodity prices have been buoyed by strong global demand, pushing some such as copper to records.
Merger and acquisition activity has taken off, and private equity firms are now in control of some of the world's biggest brands.
But as the records have continued to tumble, concerns have kept on mounting.

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