AN interesting thing is happening in the oil markets that has not received enough media attention. Given the prolonged closure of the Strait of Hormuz and the severe supply-side crisis that has hit global oil markets, there should by now have been a spiralling rise in the price of oil. But instead, we see it rise slightly above $100 and then drop below. Sometimes this follows the headlines. But overall, a mystery is developing around why oil prices are not seeing massive rises these days, even as more and more countries announce releases from their strategic petroleum reserves (SPR), which is a sure sign that physical shortages of oil are landing around the world.
One answer doing the rounds among oil analysts is the idea of ‘paper oil’. The argument is that the US Treasury is actively manipulating the price of oil by selling massive quantities in the futures market. This helps keep the price of oil down in the present. A Reuters story published on March 5, the first week of the war, kicked off rumours that this might be happening. “The US Treasury Department is expected to announce measures as soon as Thursday aimed at combating rising energy prices, including potential action involving the oil futures market”, read the opening sentence of the story, quoting a senior White House official. Brent had jumped to $85 at the time, and the IRGC had announced the closure of the Strait of Hormuz just three days earlier. To comprehend how this works, it is necessary to understand a couple of things about how oil markets function.
First, there is not a single price in oil markets. There are various benchmark prices of crude, like Brent, Dubai Light or West Texas Intermediate. These refer to the price of crude oil in a specific market. WTI is mostly for the Americas, Brent for Europe and Dubai Light for Asia. Next up are oil products like petrol, diesel and jet fuel that have their own prices. And then, there are petroleum products like naphtha or LPG that have separate prices too. Finally, there are what are called ‘futures markets’, where you can buy oil today for delivery at a future date.
Under normal conditions, all these prices will move closely with each other since they are tied. When the price of crude rises, the price of petrol and diesel will rise more or less correspondingly. The cap on these is the futures price. If crude oil for delivery in June 2026 is available for a particular price, the present-day price will not go too far above that.
Oil watchers are now wondering aloud whether active oil market manipulation has begun.
What the Reuters story was trying to say was that someone in the administration figured out that one way to manipulate oil prices, and keep them down in the short term while the war lasted, was for the US government to become a massive seller of oil in the futures market at a lower price than what the market is generating. By that time the settlement date of the contract arrives, the outcome of the war would be known and they would be betting that the US would have prevailed, and the price of oil would have either stabilised or dropped. Either way, it would be one way to stabilise the market at a higher price point, while buying some time in which to see the war through.
But things did not work out as planned, obviously. The war dragged on. The strait remained closed. And as Donald Trump grew desperate to avoid a catastrophe in the oil market, by late March his administration had issued sanctions waivers for Russian oil as well as some Iranian oil. A little earlier, they had announced releases from their SPR, usually something done when the country has been attacked.
Those steps, though, were not enough. As the war dragged on, and the last oil tankers that left Hormuz at the start of the war reached their destinations, the desperation grew. This is where the paper oil theory comes in. Oil watchers are now wondering aloud whether active oil market manipulation has begun.
If manipulation is taking place, it means the US government is now selling massive quantities of oil on the futures market, oil that they don’t actually have, at least not at the price at which they are selling it. For the racket to work, it would need to be kept under wraps, because price manipulation in any market fails if players know that the price is being manipulated. But you know price manipulation from its effects. In the oil markets, for instance, manipulation will create what sector analysts call ‘decoupling’, a situation where all the various prices that make up an oil market start moving apart from each other. To some extent, this has already happened, for example, jet fuel and diesel prices have skyrocketed beyond any of the others.
But the most important decoupling would be between the futures market and what they call the ‘physical market’. The first is oil on paper. The second is oil in hand. Normally, the price difference between them is only a few dollars. But these days, it has shot up to almost $40 per barrel. And the increase in this difference began shortly after March 20, when the previous round of steps to stabilise oil prices were taken.
Asked about this, Terry Duffy, chairman of the Chicago Mercantile Exchange, recently said that attempts to manipulate oil markets like this can create a “biblical disaster”. Another executive mentioned to the media that his firm received queries from its clients on whether a recent large spurt of transactions was initiated by the US government. If done right, price manipulation leaves no smoking gun evidence behind, because it would not work if it did. But it reveals itself by the effects it produces. And recent moves in oil markets strongly suggest that the ‘paper oil’ racket is in full swing.
The writer is a business and economy journalist.
Published in Dawn, April 16th, 2026
