The Commodity Futures Trading Commission (CFTC) filed a civil enforcement action in the United States District Court for the Southern District of New York against three energy trading firms and two individuals charging them with unlawfully manipulating and attempting to manipulate WTI crude oil prices traded at the New York Mercantile Exchange (NYMEX) from January 2008 to April 2008.

While the charges are sure to spur the blame speculators and impose position limit crowd into outrage (and already has), the details of the case highlight a point made here on several occasions. That is that real manipulation occurs in the physical market and rarely does it occur solely in the futures markets. Gresham Investment Management founder and veteran cash and futures trader Henry Jarecki has made that point in a profile and recent interview as has futures industry veteran Neal Kottke.

While it is hard to determine what moves markets at any given time, those that like to blame speculators and are pushing for tighter limits on derivatives refuse to distinguish between physical markets and derivatives. This case helps to point out the difference.

 The alleged perpetrators where more manipulators than speculators as they used the physical market to affect derivatives, not the other way around as many believe has been and continues to be occurring. They are not representative of those entities using the futures market to gain long exposure to commodities. They actually made a great deal of their profits in the scheme—a net of $35 million according to the CFTC—on the short side.

 As with the Hunt Brothers—thought not on as grand a scale—the alleged manipulators accumulated a large physical position while at the same time establishing a large long futures position. The firms in question: Parnon Energy Inc. of California, Arcadia Petroleum Ltd. of the United Kingdom, Arcadia Energy (Suisse) SA of Switzerland, outdid the Hunt’s allegedly, in that they attempted to profit on both ends by holding supply away from the market while long and then going short before dumping their physical supply on the market.

It is an interesting story, which we will follow but before everyone gets too carried away we should remember the time frame. This all allegedly occurred in the first four months of 2008, well before crude oil’s blow-off top and subsequent collapse.

 But as noted by many experts, the key to any manipulation scheme is the ability to manipulate physical supply.