I know that speculators and manipulators was a big topic of discussion when the price of oil rose to a record $147/bbl last summer. Since then, talk has lost steam as a result of prices dropping back down to around the $50/bbl level. However, it now seems like we have the beginnings of some proof about manipulation of the price of oil by Goldman Sachs that I find very interesting. Unfortunately, it does not seem to be much of a mainstream press story.
The background relates to a very large private Oklahoma based midstream energy company named SemGroup, L.P. SemGroup was a midstream company that provided gathering, transportation, storage, distribution, and marketing services to a oil and natural gas producers. The bulk of their operations were in the U.S. although they did have international operations as well. SemGroup also owned a large percentage of the units of a publicly traded master limited partnership (“MLP”) that it created in 2007 named SemGroup Energy Partners, L.P. From this public MLP, we are able to find out a significant amount of information about its parent company. The public filings for the MLP can be found here.
SemGroup was a very active commodities trader and derived significant profits from its trading operations over the years. They also proved to be the company’s undoing as they essentially bet that the price of oil would go down through their trading activities and would up incurring massive mark-to-market trading losses of approximately $2.4 billion by July 2008 as the price of oil kept rising. They ended up having an approximate $500 million margin call that they were unable to meet and they stunningly filed bankruptcy on 7/22/08. The amazing thing is that there were essentially no warning signs that the company was in trouble. It turns out that the company was using commodity derivatives to speculate rather than hedge their operations, which violated the terms of their bank lines of credit. They were also likely fraudulently providing false reports to their banks and they were certainly not abiding by the terms of their internal risk policies. The prime culprit in all of this was their President and Chief Executive Officer, Tom Kivisto, who was responsible for the trading activities.
A very detailed and interesting report was recently completed by former FBI director, Louis Freeh, who was appointed by the bankruptcy court to perform an examination of the events that led to SemGroup’s bankruptcy. A PDF of the report can be found here.
Now comes the interesting part. There is circumstantial evidence that Goldman Sachs may have pushed SemGroup into bankruptcy by manipulating the price of oil through its trading company, J. Aron & Co. Basically, SemGroup attempted to raise capital through a private placement of equity in December 2007. Goldman Sachs was the main party that SemGroup was negotiating with, and, in fact, Goldman had previously completed two prior equity private placements for SemGroup. It is alleged that during Goldman’s due diligence process they became aware of SemGroup’s trading positions and manipulated the price of oil upwards.
A recent Forbes article summarizes this here.
I don’t really have a debate for this other than, I guess, did Goldman Sachs manipulate the price of oil.
You will recall that Goldman Sachs was one of the primary parties talking up the price of oil last year: Oil to $200/bbl.
Finally, the effect of this would obviously have been felt worldwide by every consumer of oil. John Catsimatidis, the man attempting to reorganize SemGroup, estimates this as a $500 billion fraud on the world, which would have been the effect of a $50/bbl increase on oil for 100 days.
