JPMorgan Accused Of RINs Manipulation

JPMorgan Accused Of RINs Manipulation

We have discussed RINs a number of times in the past year – pointing out the surge in the price of these ethanol credit-related derivatives and how they are the gas-market’s four-letter word. As we explain below, the NY Times notes that the recent surge in the price of this little-known financial instrument – which was in large part responsible for the rise in the price of gas at the pump, could have been manipulated by JPMorgan. As they note, the market in ethanol credits is exactly the kind Wall Street loves: opaque, lightly regulated and potentially very lucrative; and the ability for a major player to build a stockpile of these credits (effectively cornering the market) is relatively straightforward given the lack of detailed regulation. As Senator Thomas A. Coburn, Republican of Oklahoma, notes “When you see something change as rapidly as this, somebody’s hoarding them, somebody’s buying them, somebody’s making big bucks.”

Nothing to see here…

Via NYTimes,

Every time they mix ethanol into gas, or import fuel already blended with ethanol, energy companies get a credit from the government, and that credit can be sold to other companies that don’t blend ethanol to help them meet federal requirements. If refiners fall short of their obligation, they can face fines of $32,500 a day. To monitor compliance, each gallon of ethanol is assigned a 38-digit Renewable Identification Number, or RIN. Six billion of them were generated in the first six months of this year.

The E.P.A. makes sure participants comply with the fuel standard. But rules that apply to almost every other market — on transparency, disclosure and position limits, for example — are not imposed on the trade of RINs, making Wall Street’s role harder to gauge.

If Wall Street traders take a 5 percent stake in a public company’s stock, for instance, they are required by law to flag that they have acquired a sizable stake in a filing with the Securities and Exchange Commission. There is no such obligation for traders buying RINs.

In the case of JPMorgan, the industry executives familiar with its activities in the RINs market said they were told by a top banker in its commodities operation about the stockpiling. The executives said the banker maintained that one of JPMorgan’s traders had urged the bank to buy up every available credit. The executives spoke on the condition of anonymity for fear of harming business relationships.

The market in ethanol credits is exactly the kind Wall Street loves: opaque, lightly regulated and potentially very lucrative.

It is difficult for outside groups, or even other regulators and law enforcement agencies, to keep tabs on the market, because the E.P.A. declines to disclose who actively trades the credits, or how much they trade, citing the confidentiality of refiners and other participants.

Trading is a private affair, usually conducted by phone, and just about anyone can participate.

“There is a RINs trading desk at any major brokerage now,” said Paul Niznik, bio-fuels manager for Hart Energy, based in Houston. “There are people who are not refiners that are buying and selling RINs like a commodity. They treat it like something to be traded, to be day-traded.”

But how did this all start?

The RINs story began in 2005, when the Bush administration joined Democrats in Congress to pass an energy bill mandating renewable fuel standards. That law was broadened in 2007 to establish requirements for the amount of biofuel to be blended into gasoline annually through 2022. This year, refiners and importers are required to blend 13.8 billion gallons of ethanol, up from 13.2 billion last year. For 2014, the figure is 14.4 billion.

But the estimates Congress used about how much gas Americans would keep buying were wrong. When the biofuel credits were created, gasoline consumption was projected to grow 6 percent by 2013. But thanks in large part to the recession and more fuel-efficient cars, consumption has actually fallen.

As a result, refiners this year began hitting what is known as “the blend wall,” meaning that the amount of ethanol the government is requiring them to use is close to the maximum amount that can be blended into gasoline without creating problems for gas stations and motorists.

Distributing gasoline with greater levels of ethanol is more costly and corrodes gas station pumps and tanks. Raising the ethanol level in gasoline, therefore, would require gas stations across America to install new systems. Therefore, refiners have turned to RINs to meet their government obligations rather than blend more ethanol into gasoline.

Somebody’s hoarding…

“When you see something change as rapidly as this, somebody’s hoarding them, somebody’s buying them, somebody’s making big bucks,” said Senator Thomas A. Coburn, Republican of Oklahoma, a big oil state. After his staff examined the run-up in prices this summer, he said he was concerned that “big moneyed interests” were gaming the credits.

More Government-inspired Unintended Consequences…

Ms. Oge, who retired from the E.P.A. last year and is now a visiting scholar at the International Council on Clean Transportation, a research group in Washington, said RINs were never supposed to affect the price of gasoline at the pump. If that is the result of the price run-up this year, as many energy analysts predict, it would be an unwelcome outcome, she said.

The last thing we wanted in implementing this program is to get price increases for the consumer,” she said.

The problem the E.P.A. had is they opened up the market on the trading side, but restricted it on the obligated side to refiners and importers,” said Lawrence J. Goldstein, the former president of the Petroleum Industry Research Foundation, a nonprofit bipartisan group.

Explosive gains…

We are exploring things like increasing the regularity of updating the transactional data system and providing more information about production volumes,” Mr. Grundler, the E.P.A. official, said. “All are aimed at increasing confidence in this market and increasing compliance, which is our major concern.”

But Tom Kloza, an analyst at the Oil Price Information Service, a leading source of petroleum pricing, said the potential for abuse will not disappear on its own.

You could conceivably have a company in the middle holding millions of RINs,” Mr. Kloza said. “Any entity could have a 1, 2 or 5 percent market share in RINs and is waiting to sell them at some explosive gain. I wonder, who’s got the score card?”

So LIBOR, FX fixes, Aluminum, gold, silver… and now RINs? So glad we bailed them out five years ago…

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