Oil price high caused by slick rogue trader

Published on Friday 3 July 2009 10:00

A ROGUE trader has been blamed for creating a spike in oil prices which saw them hit their highest level so far this year.

The trader is understood to have placed a major bet on the Brent oil market in June, which resulted in oil prices rising from $71 to $73.50 in just one hour.

The order saw futures contracts for 16 million barrels of oil change hands in just one hour on Tuesday, double the daily production of Saudi Arabia and far in excess of the average trading of 500,000 barrels.

The spike in trading was so pronounced that some traders believed they must have been caused by a geopolitical event, with unrest in Nigeria originally among the explanations. It has now emerged that one man may have been the cause, after a London brokerage admitted it had been the "victim of unauthorised trading" which had led to a loss of 6m.

PMV Oil Associates, the world's largest over-the-counter oil brokerages, said it was conducting a full investigation into the incident, and had informed the Financial Services Authority and the InterContinental Exchange, which is where much European trade takes place.

The London-based, privately owned company added: "As a result of a series of unauthorised trades, substantial volumes of futures contracts were held by PMV. When this was discovered, the positions were closed."

Traders in London and New York said the rogue broker is thought to have accounted for at least half of the unusual activity, although the rest is understood to have been traders "chasing the rally" by putting in bids on the market based on his deals.

Analyst Nick McGregor, of Redmayne Bentley, said: "This all happened within an hour at about two o'clock in the morning, and of course in a thin market at that sort of time, it doesn't take an awful lot to move the price."

With volume so thin, the trade stood out, which is why the "rogue trade" has emerged so quickly, Mr McGregor added.

Prices yesterday had dropped back to $66.73 a barrel.

This is believed to be the second incident of rogue trading in oil this year. City watchdogs banned a Morgan Stanley trader in May after he hid potential losses on trades made while under the influence of alcohol.

Regulators are now considering tougher oversight of the commodities market to avoid the danger of speculators surging oil and agricultural prices.

PMV's head, David Hufton, has been an outspoken critic of speculators in the oil market, and in 2006 said: "If futures exchanges did not exist, oil prices would be a lot lower."

Oil is the world's most heavily traded commodity, with trading centred on the ICE in London and the New York Mercantile Exchange or Nymex.

Brokerages like PMV place orders on behalf of large banks and hedge funds.