Magic Wool simply vaporizes
In two consecutive actions by an AI player, the game log shows wool being magically manufactured out of thin air by an AI player, and then apparently vaporizing shortly after.
In this situation an AI player rolled a seven. I had a brick and a coin in my hand. The AI player robbed me, yet I stilled had the same brick and wood in my hand after being robbed. But wait, there's more ...
The AI player then played a Master Merchant on me, taking two wool (which I didn't have in my hand). The AI player played a second Master Merchant, again taking two more magic wool according to the game log. I have both my animation and AI speed turned down, so I could see this happening in real time. After being robbed and having four non-existent wool taken from me by the Master Merchant, I still had the same old brick and coin I started with before the roll began.
After it was all over, the AI player that appeared to magically conjure up wool from thin air ended up with only two cards in their hand, and only a single city improvement in the Trade category. So that means the AI player couldn't have used the wool for city improvements. I'm pretty sure the same AI player had no changes on the board either, so it wasn't like they traded the magic wool for resources. I have a screen shot that includes the game log and shows these actions.