Thursday, June 29, 2006

More on the Alleged BP Corner

I've been taking numerous calls from the press on the alleged BP cornering scheme (see my blog from last night). I have had a chance now to read a bit more about it, and in particular I read the Wall Street Journal's page one, 1500 word story on the events.

What I found most surprising is that the WSJ missed, or left out, some key points. First, and as I said in my post last night, the complaint itself admits that BP did not make any profit from the scheme. Now I agree that this does not mean there wasn't an attempt to corner the market, but shouldn't any story mention the key fact that the strategy appeared unsuccessful? Even better, the reporters should dig into why profits weren't made. Perhaps, the traders who were short found other ways to cover their positions? Or, maybe there were just not that many shorts who needed to cover their positions with February propane. Going along with this, there is ample evidence in the complaint that other traders had suspicions of BP's attempts to corner the market -- one trader referred to a BP trader as "Cody Hunt," a joking reference to one of the Hunts of the silver market corner.

The second fact that the WSJ left out, which is in the complaint, is that on February 15, the pipeline supplying this market ruptured, "reducing the amount of propane that could be delivered from the pipeline." With all the discussion in the WSJ piece about higher prices, would it not be appropriate to mention the possibility that other factors, like a ruptured pipeline, might have caused the price increases?

Third, what exactly is the link between one month's contract for TET propane and any wholesale or retail prices for propane? That is, how would even a successful corner on something so fleeting as a one month episode have a meaningful impact on real prices? I do not dispute that cornering activity is destructive of the real purpose of commodity markets, which is to discover what the price should be at any point in time on the basis of the fundamentals of supply and demand. And resources devoted to cornering are wasteful in that they are devoted to purely redistributive goals. But let's keep a rational perspective and not think that such temporary price disruptions necessarily flow through to consumers in any kind of direct fashion.

One last thing in the complaint that is intriguing is that BP, on February 24, redesignated 3 million barrels of February propane as now being available for March. Reading between the lines a bit in the complaint, I think the CFTC viewed this as a further attempt to reduce March supply. An alternative explanation is that BP saw that they would not be able to unload all their huge February supply, so they started taking action to make it available in the future.

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