BP is under federal investigation for allegations that a group of executives plotted to corner the propane market. And corner they did, but instead of making $20 million, they lost $10 million.
Their alleged scheme involves something known as “squeezing the shorts” whereby a commodity’s delivery is sold for future delivery. When shipping time comes, the shorter wants to buy lower and make a profit. In early ’04, BP had effectively bought up the propane market and prices were rising. The BP cabal hoped to sell at high prices to short sellers frantic to cover their positions. However, by delivery time, the speculators they had hoped for, simply were not there. In addition, warm weather and an influx of foreign propane, attracted by the high prices, caused the prices to crash.
In order to corner a market, “You’d have to buy from different agencies, buy at different times and in small blocks so that it doesn’t attract attention,” said Carl Tannenbaum, chief economist at LaSalle National Bank to the Chicago Tribune, “And, by God, you shouldn’t be caught on a recorded line saying what you’re doing.”
A snippet of those conversations, replete with “Dude’s” and expletives, after the jump…
Speaker One: How does it feel taking on the whole market, man?
Speaker Two: Whew! It’s pretty big, man.
Speaker One: Dude, you’re the entire [expletive deleted] propane market.
Speaker Two: Yeah, I think uhh. . . .
Speaker One: Where are all these, where are all these. . . .
Speaker Two: We had some participants coming in this morning thinking it was a pretty good buy.
Speaker One: Where, where are all these barrels, I mean I saw, I mean you did some big rolls yesterday with LD and Shell right?
Speaker Two: Yeah.
Speaker One: Yeah, I mean, where are all these barrels coming from in April, man?
Speaker Two: That’s what we’re gonna find out.
Speaker One: I mean, gimme a break, I don’t understand. I mean, there’s not that many barrels available, dude.
Speaker Two: I know it.
Speaker One: I mean, I don’t get it. And it’s a good value, dude. I don’t know what’s going on.
Speaker Three: I wouldn’t worry about it, don’t worry about it. It’s the first two days of the month. Plenty of lead time for people to think the barrels will emerge and take a short position.
“How Not To Corner The Propane Market” [CT]