WASHINGTON (AFX) - When the spot price of propane jumped 50 percent in some parts of the country in late February 2004, it wasn't likely to have been from any surge in demand from rural homeowners cranking up the heat. In fact, in the Northeast, a major consuming region of this liquid fuel, the weather was quite mild.
What drove the spot price of propane as high as 94 cents a gallon in places like New York, Pennsylvania and Illinois, according to federal investigators, was a deliberate effort by BP traders to corner the market and then profit from it.
The alleged price-manipulation scheme, which BP denies, worked like this: traders at BP Products North America Inc. bought massive quantities of propane to be delivered over a pipeline that starts in Texas and then withheld supplies, forcing other buyers in the wholesale market to pay an unnaturally high premium.
In the end, though, BP did not profit because the financial benefits of the scheme were outweighed by the unexpectedly huge costs associated with carrying it out, according to the civil lawsuit brought by the Commodity Futures Trading Commission. Moreover, it is not clear that the brief jump in the price of propane deliverable on the TEPPCO pipeline at the end of February 2004 resulted in significantly higher costs for retail customers.
'In a legal sense, it poses no barrier to us in proving a manipulation,' Joan Manley, the CFTC's deputy director of enforcement said Thursday. 'Just because they didn't make a profit doesn't mean they didn't cause injury to various classes of victims,' including traders, propane distributors and consumers.
BP's market behavior in February 2004 raised eyebrows at the time to some within the industry. In a recorded telephone conversation included as evidence in the CFTC lawsuit, a trader from another company referred to BP as the modern-day 'Hunt Brothers' -- a reference to a wealthy Texas family that cornered the world's silver market in the 1970s.
And in a conference call with journalists on Thursday, the Rev. Jesse Jackson said he was trying to organize a nationwide boycott of BP for a wide range of reasons, including price gouging. 'Those whose heating costs were driven up by this manipulation must get their money back,' he said.
BP spokesman Ronnie Chappell said the company has cooperated with investigators, but plans to fight the charges even after firing several employees involved in the alleged manipulation because 'they failed to adhere to BP policies governing our trading activities.'
BP's alleged plan to manipulate the market came amid declining propane prices that were particularly painful to BP traders because they had made significant bets that prices would rise, according to the CFTC lawsuit, which was filed Wednesday in the U.S. District Court for the Northern District of Illinois.
The CFTC portrayed trading manager Mark Radley as a key architect of the plan to turn the situation around by cornering the market, but said he executed his strategy 'with the knowledge, advice and consent' provided by the company's former chief operating officer and other executives.
Radley's plan, according to the CFTC, was to establish a massive 'long' position in the propane market, one that would be large enough to give BP the market power needed to 'squeeze' competitors who were 'short,' or betting that prices would fall.
Being 'short' was not an unreasonable position to take, according to the CFTC, because forecasters were predicting a stretch of warm weather in the last two weeks of February and there were high levels of imports, which make up the bulk of propane consumed in the U.S. When it came time for rival traders with 'short' positions to fulfill their supply obligations by purchasing propane, BP traders 'dictated' that they pay steadily higher prices, according to the suit.
BP demanded as much as 94 cents a gallon on over-the-counter markets and this eventually caused prices to rise on the New York Mercantile Exchange, the CFTC said.
Because the winter weather was warmer-than-anticipated, propane inventories in the TEPPCO system swelled, forcing BP to continue buying more in order to maintain its controlling position in the market.
'They failed to make the anticipated profit,' the CFTC explained in its lawsuit, 'because the costs associated with acquiring the dominant and controlling position in February ... were greater than the profits they extracted from the shorts whom they cornered.'
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