Almost a month ago I raised the possibility that the sharp drop in oil prices in the run-up to the November elections may be the result of manipulation. This has been an easy argument to brush aside, as there are also fundamentals behind the recent drop: this hurricane season hasn't lived up to the hype, causing some speculators to bail out of their oil plays. Also, geopolitical tensions impacting oil supplies have been simmering on low (though some of this--especially the easing of pressure on Iran, may not be entirely innocent). Never the less, the potential for price manipulation has received coverage from most of the mainstream media (though mostly as a preface to dismissing the concern). While I think that I presented several very plausible manipulation scenarios, over the past week there has been one theory (not one of mine) that has cearly risen above the rest: a change in the composition of the Goldman Sachs commodity index led to a massive sell-off in oil-complex futures. The Goldman Sachs commodity index is publicly available, and it acts as the benchmark for the composition of over $100 Billion in commodity funds. Suddenly, and without explanation, Goldman Sachs changed the Unleaded Gasoline component of the index from 8.72% to 2.3%, which sparked a lingering sell-off of over $6 billion dollars in oil-complex futures as funds scrambled to bring their portfolios in line. This was in no way a reflection of the fundamental supply and demand picture, just a quirk of the financial markets. With this theory now out in the open, there is speculation that Goldman's close ties to the Bush administration may be involved, but that is a more of a diversion: this is important not because it may or may not suggest political maneuvering, but because it strengthens the argument that the recent drop in oil prices is not based on fundamentals.
As deconsumption recently pointed out, even the NY Times has picked up on this story.