Gas Prices Manipulated Before the Elections by Goldman Sachs - Mercedes-Benz Forum

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post #1 of 3 (permalink) Old 10-12-2006, 06:52 PM Thread Starter
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Gas Prices Manipulated Before the Elections by Goldman Sachs

Is Goldman Sachs manipulating the gasoline futures market to push prices down before the November elections?

It sure looks that way.

An article appeared this Saturday in the New York Times pointing to some unusual trading by Goldman Sachs in the gasoline futures market. As Raymond Keller, who spotted the article, points out, "They always hide the good stuff in the low circulation Saturday edition."

What’s Goldman doing?

Here’s how the Times reports it:

Politics and worries about oil supplies may have caused gasoline prices to go up at the pump earlier this year, but one big investment bank quietly helped their rapid drop in recent weeks, according to some economists, traders and analysts.

Goldman Sachs, which runs the largest commodity index, the G.S.C.I., said in early August that it was reducing the index’s weighting in gasoline futures significantly. The announcement did not make big headlines, but it has reverberated through the markets in the weeks since and some other investors who had been betting that gasoline would rise followed suit on their weightings.

"They started unwinding their positions, and those other longs also rushed to the door at the same time," said Lawrence J. Goldstein, president of the Petroleum Industry Research Foundation. The August announcement by Goldman Sachs caught some traders by surprise. The firm said in early June that it planned to roll its positions in the harbor contract into another futures contract, the reformulated gasoline blendstock, which is replacing the harbor contract at the end of the year because of changes to laws about gasoline additives. Later in June, Goldman said it had rolled a third of its gasoline holdings into the reformulated contracts but would make further announcements as to whether the remainder would be rolled over. Then in August, the bank said it would not roll over any more positions into gasoline and would redistribute the weighting into other petroleum products...

Some traders speculated that Goldman might have been concerned about the liquidity of the reformulated contract and whether other traders would embrace it because there were so few contracts outstanding. The open interest, or number of futures contracts taken out, has increased ninefold in the reformulated contract since then.

Unleaded gasoline made up 8.72 percent of Goldman’s commodity index as of June 30, but it is just 2.3 percent now, representing a sell-off of more than $6 billion in futures contract weighting.

A sell-off of more than $6 billion in gasoline futures contracts? Let’s put it this way, a $6 billion trade is not decided on at the lower levels of the firm.

Keller provides some insight into the curious timing of this trade:

President George W. Bush nominated Henry M. Paulson, Jr. to be the 74th Secretary of the Treasury on June 19, 2006. The United States Senate unanimously confirmed Paulson to the position on June 28, 2006 and he was sworn into office on July 10, 2006. Before coming to Treasury, Paulson was Chairman and Chief Executive Officer of Goldman Sachs. So what does Goldman do just weeks after Paulson is sworn in as Treasury Secretary? It announces a subtle move that drives down gasoline prices, short-term. Nice move, coming just months before the election.

Now it may be hard to swallow for some that market manipulations go on, but they do at all levels. Penny stock promoters cook up their schemes, and power players have their schemes. In traders jargon, it’s called painting the tape. Indeed, the Washington Post has revealed that the government has formed something that is casually known as the Plunge Protection Team. PPT is supposed to jump in and buy stocks when things are unruly. Ronald Reagan formed the PPT when he signed Executive Order 12631. It’s just another way of painting the tape (Using your tax money, or newly printed Federal Reserve dollars, of course). Goldman is a member of the secretive PPT.

But some just don't believe these kinds of manipulations go on. I have had some email discussions in recent days with some pretty sophisticated economists who don’t believe Goldman has manipulated the gasoline market. Their argument goes: "I will continue to be an economist and look at the supply and demand issues."

My reply has been, Goldman Sachs understands supply and demand – and they also understand trading. When you sell-off $6 billion in gasoline futures contracts, you are going to have an impact – as the New York Times story correctly pointed out. That is an awful lot of supply. Further, this type of aggressive selling will result in selling by others who will receive margin calls they can’t meet. And by trend followers, who will suddenly dump gasoline and other commodities. This is, indeed, exactly what is happening. Goldman Sachs didn’t get to be Goldman by not understanding this stuff. Supply and demand can explain this manipulation completely.

My email correspondents also raise a few other points.

They ask, "Why would Goldman Sachs trade this way and lose money?" The answer here is that Goldman doesn’t lose money. This is a managed commodity index. Goldman manages the index, but the actual money put up comes from institutions, hedge funds and other unlucky saps that trusted Goldman to manage the commodity index as a hedge against inflation – not to bail out of $6 billion in contracts over a few weeks. The result: Unlucky saps – Major losses. Goldman – Zero losses and their man running the Treasury. Which side of this trade would you want to be on?

But, my email correspondents continue on with one more charge: "Are you trying to tell me that refiners are trying to deplete their inventories and leave themselves with real supply problems in the future? That does not make sense to me." In fact, depleting inventories is exactly what refiners would do. If the price of gasoline is plunging in the futures market, they are going to push out the door as much inventory as they can, to make room for the new cheap gasoline they can buy up on the futures market.

Bottom line, Goldman had to know they were going to plunge gasoline prices short-term with this type of trading. This smells to me like a Paulson operation all the way. He is the ultimate behind the scenes operator if there ever was one, and future biographies of him are very likely to note such.

Thanks, D.

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post #2 of 3 (permalink) Old 10-12-2006, 07:04 PM
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The end justifies the means. Happy ending afaiac!

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post #3 of 3 (permalink) Old 10-21-2006, 08:45 AM
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Russia-EU's 'gas tag-of-war'
By Richard Galpin
BBC News, Takro-Sale, Siberia

Gazprom is not investing enough in infrastructure, critics say
The small town of Tarko-Sale lies just below the Artic Circle in the remote north-western corner of Siberia.

In mid-winter there is permanent night as the temperature plummets to -50C. In mid-summer there is permanent day accompanied by tropical heat and swarms of mosquitoes.

For many this would be the precise definition of hell on earth.

But the town has a quiet, contented atmosphere. The buildings are modern and well-kept. There are smart office blocks.

"People love this land, people are proud of it," says Elena who lived here for many years.

Gas fields

The reason for such unexpected delight lies beneath the ground.

Around Tarko-Sale lie vast gas fields which have transformed life for much of the local population over the past 10 years, bringing jobs and the money for good schools and colleges.

Gazprom's imposing HQ is testament to its commercial power

To reach the fields requires a further journey across the desolate, frozen plains of Siberia with their stunted, apparently lifeless trees.

It is not easy. Our helicopter cannot fly because of the weather conditions and the pontoon bridge across a large semi-frozen river has not been completed.

We have to transfer onto a small boat.

But soon the tell-tale flames of gas being flared are visible above the trees around us and we reach the first isolated cluster of machinery and pipes drawing the gas out of the ground and transporting it across Russia and beyond.

Europe's worries

The workers, wrapped in heavy winter clothing, move slowly across the site through the thick snow which marks just the beginning of the long months of extreme cold.

They are probably not aware of it, but those working in the energy sector here in this bleak region of Siberia have now become indispensable to many countries across Europe.

Mr Putin told EU leaders Russia was a reliable energy supplier

Some of the world's largest gas fields can be found here and a significant proportion of the gas is sold to the European Union.

But as Europe becomes ever more dependent on Russian gas, leading energy analysts have told the BBC they are worried that Russia will not be able to meet the growing demand.

'Chronic underinvestment'

They say the huge state-controlled company, Gazprom, which provides around 90% of Russian gas supplies, has not been investing enough in future production and infrastructure.

According to the International Energy Agency, Gazprom has commissioned just one new gas field in 20 years.

And it says that could lead to a shortfall because three of the company's most important fields here in Western Siberia are now in decline.

"There could be quite a large gap between what Europe needs and what Gazprom is able to produce, assuming there is no investment in new production," one analyst told the BBC.

"The Russian gas sector is chronically underinvested and it's becoming worse and worse," confirms Sergei Medvedev of the Moscow School of Economics.

"Especially as Gazprom is embarking upon big imperialist designs with big investments overseas [in countries like] Bolivia and Venezuela. They're diverting the much needed investment from the domestic production sector, from exploring new fields.

"So Europe has really to be cautious about the safety of Russian gas supplies," Mr Medvedev says.

'Gas wars'

Europe's faith in the reliability of Russia as an energy supplier has already been shaken in many different ways over the past 11 months.

At the beginning of the year there was the price dispute between Moscow and Ukraine which led to Gazprom briefly shutting off gas supplies - a drastic move which had a knock-on effect on Europe.

There have also been statements by Russian officials about their increasing interest in exporting gas and oil to Asian markets, stoking fears that Europe could lose out.

And earlier this month, there was the shock announcement that Gazprom would develop the world's largest offshore gas field, Shtokman, without any foreign energy companies as partners.

It is little surprise then that Russian President Vladimir Putin was invited to meet EU leaders in Finland with energy the main subject on the agenda.

'In powerful position'

They are pressuring him to liberalise the Russian energy sector and allow much great foreign involvement in particular to end Gazprom's monopoly over the pipeline network.

But President Putin knows he is in a powerful position.

His country sits on a quarter of the world's gas reserves.

And within 20 years Europe will need to import 80% of its gas.

According to Russian analysts, EU leaders need to offer him something in return.

And that could mean allowing Gazprom, which is already the world's largest gas company, greater freedom to buy major energy companies and distribution networks in Europe. Such a move that would greatly increase Russia's influence across the region.
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