Wall Street is awash with oil

Raj Rajaratnam, founder of the worlds largest Hedge Fund group ‘Galleon’ was found guilty on Wednesday on nine counts of ‘securities fraud’ and five counts of 'conspiracy to commit fraud'. Rajaratnam is worth 1.6 billion, however, his crimes are ‘petty’ considering the scale of Wall Street's dark practices. The prosecution of the South Asian business man, is viewed as a warning shot. Rajaratnam being found guilty by a jury of twelve has rocked Hedge Fund groups, who fear that it might embolden prosecutors to dig into their private affairs, spook the market, and increase wild volatility.

Misdirected gloom.

For weeks, the high price of oil in the U.S has been central to social and political discussion, prompting executive action. Last April, President Obama ordered U.S Attorney General Eric Holder to set up a Task Force to investigate whether fuel prices were being kept high artificially.

In the U.S, the extortionate price of Crude oil at $130 per barrel, has led to prices reaching $4 a gallon at the pump on main street. It’s widely believed that prices are being driven up by 'underhand' speculating on Futures. Crude oil was at an all time high in 2008, but those prices were linked to Crude being horded, and taken off the market. Hording took place due to a reduction in crude oil supplies from Saudi Arabia. In addition, oil supplies were believed to be at its peak. That period is often referred to as the ‘Peak Oil Crisis’.

Two days ago, a rather alarmist article appeared in the U.K's Daily Mail which heralded the arrival of the £6 ($9.7) gallon of petrol, (gasoline). It cited instability in the Middle East as the prominent factor eventually driving up crude to a whopping £200 ($326) per barrel. The British doom laden article by Ray Massey failed to mention anything to do with market manipulation.

In spite of the current crisis in Libya, Crude oil supplies remained consistent. Libya’s quota in OPEC is being filled by other members of the international syndicate. Furthermore, OPEC is set to increase its crude demand forecast by an extra 1.4 million barrels per day this year.

Monkey see, Monkey do.

Since there's no significant crude shortage, (some market Analysts actually believe that the market is awash with oil), the only rational explanation for the high price of crude has to be unethical speculating, raising the stakes in expectation of a crisis.

The suspicion of a ‘white collar conspiracy’ fits in neatly with the 20-30% increased profits that major oil companies have made in the first quarter of 2011. But, this doesn't automatically suggest there's been wide spread white collar crime. In fact, its likely majority of futures contracts have a hint of ‘monkey see, monkey do’ .

Brent and U.S light sweet crude has dropped in price as the U.S Dollar gains additional strength against the Euro this week. However, some market watchers contend that Crude prices 'shot up'  because the ‘margin requirements’ (margin collateral) placed on crude was not raised high enough.

Some analysts have pointed out CME risk management's decision to raise margins and the latest drop in oil prices earlier this week. CME Group raised margin requirements on gasoline contracts by 21% causing a significant fall in crude prices. However, some fear that such action could cause a deep plunge in prices akin to the drop in silver. Silver dropped by 60% after margins were raised about five times in two weeks. As of this moment, the price of U.S light sweet crude has dropped from almost $130 per barrel 10 days ago, to under $100.

Despite the significant drop in Crude oil prices it hasn't dropped enough to bring down fuel prices at the forecourts. When it does eventually reduce prices, it's expected to happen is small drips and drabs, hence prolong the agony for consumers. Meanwhile, back on Wall Street it's business as usual. The recent fall in crude prices has already unleashed bargain hunters eager to pick up the pieces and start the cycle all over again.

Sources:

Huffpost Business, Hedge Fund Manager Raj Rajaratnam Found Guilty On 14 Counts Of Insider Trading.11, May.

Reuters, CME Raises Crude Margins Fourth Time Since February, 9th May.

The Wall Street Journal, Oil Futures: Crude Declines As Dollar Continues to Rise, J, DiColo, 12, May.

Mail Online: The £6 Gallon Has Arrived: Price of Petrol Hits Historic High, R, Massey, 10, May.

The United States Department of Justice.