Traders are standing by Platts, the company that provides benchmark prices for much of the world’s energy products, amid a European probe into market manipulation.
A total of 34 out of 55 traders, brokers and analysts surveyed by Bloomberg News yesterday, or 62 percent, said the pricing system run by Platts, the energy news and data unit of McGraw Hill Financial Inc. (MHFI:US), is still the best way to determine prices in the $3.4-trillion a year market for crude and refined products. Royal Dutch Shell Plc (RDSA), BP Plc (BP/) and Statoil ASA (STL) said they’re also being investigated by the European Commission following raids in three countries May 14.
As much as 80 percent of all crude and oil-product deals are linked to reference prices including those published by Platts, according to estimates by Total SA, Europe’s third biggest producer. The European investigation marks the third time global pricing benchmarks have drawn regulators’ scrutiny in the past year following inquiries into bank manipulation of the London interbank offered rate, or Libor, and ISDAFix, the benchmark for the $379 trillion swaps market.
“Blaming Platts is akin to shooting the messenger,” said Stephen Schork, president of Schork Group Inc., a consultant in Villanova, Pennsylvania. “Given the quantity of oil being traded in hundreds of different markets around the globe, the price assessments are a fast, reliable method to broadcast information to the general market in a timely fashion.”
European regulators didn’t name the subjects of their probe and haven’t specified the markets they are investigating or the methods in question. “Companies may have colluded in reporting distorted prices to a Price Reporting Agency to manipulate the published prices for a number of oil and biofuel products,” according to a May 14 statement by the EC.
Kathleen Tanzy, a Houston-based spokeswoman for Platts, yesterday said it didn’t have anything to add beyond earlier confirmation that the EC has undertaken a review at its office in London in relation to its price assessment process. In a submission to a 2012 report by the International Organization of Security Commissions on oil pricing regulation, the company said external controls over its activities would be an “unacceptable intrusion” on its rights as a publisher.
“For now there’s no proof of anything, so it’s important to wait and see if anything comes out of this or nothing,” said Olivier Jakob, managing director at Petromatrix GmbH, a consultant in Zug, Switzerland. “It’s difficult to make a price assessment of the physical market, it’s not a clear-cut process.”
Platts’s North Sea Dated Brent benchmark sets the price of half the world’s crude, from Canada to Australia. Its kerosene assessments are used by the airline industry where fuel accounts for about a third of operating costs, according to the International Air Transport Association. Among pricing companies, Platts assessments represent as much as 95 percent of crude trades and 90 percent of oil products and over-the-counter derivative deals, Total said in a submission to a report on oil pricing last year.
The influence of price reporters stretches beyond oil. The assessments published by Platts and its competitors including Argus Media Ltd. and ICIS, a unit of Reed Business Information, are used to value the raw materials used in the $2.2 trillion global base chemical industry as well as coal, power, metals, emissions, liquefied natural gas and shipping rates.
Statoil described the EC’s allegation as a “serious suspicion.” The suspected violations are related to the Platts’ Market-On-Close assessment process, or so-called window, and may have been ongoing since 2002, Statoil said.
Platts determines daily prices in the over-the-counter energy markets in one of two ways, the first being transactions made online during prescribed times, known as the MOC window, a process in place since 1992 and used only for selected products that have industry-agreed specifications. The second method involves Platts employees discussing prices with market participants each day, many of them anonymous, and then determining the daily settlement.
These methods in the so-called physical markets contrast with the daily prices seen for exchange-traded futures ranging from Brent and West Texas Intermediate crudes to Nymex gasoline, which trade almost around the clock and are publicly disclosed.
Platts determines prices at particular times in its MOC, for example 4:30 p.m. in London. Only Platts customers can view the window and any registered company can post bids and offers.
Two of the four people surveyed who said the EC investigation was damaging to Platts replied that it will result in permanent changes to how prices are assessed in the physical oil market. Eleven of the 55 respondents, who asked not to be identified because they aren’t authorized to speak on the matter, said it’s too early to decide whether the inquiry poses a threat to the Platts MOC, and six declined to comment.
One trader among the 34 people who said that the current pricing methodology works added that, even if several market participants have disagreed over the years with Platts assessments, the company’s system is transparent and functional.
The EC’s inquiry calls into question the capacity of agencies such as Platts to “filter out manipulative behavior,” and the possible rigging of oil prices “has serious implications for national economies,” said Roderick Bruce, an analyst at IHS Energy, a consultant in London. The MOC window may be vulnerable to distortion because it focuses on transactions in a short time period, Bruce said.
“If the EU actually finds something at one of these big oil houses, then it will be ugly,” said Schork. “It could happen but I am skeptical they will find something.”
The International Organization of Security Commissions, a global financial supervisor based in Madrid, is also reviewing whether benchmark price-setters are meeting international standards, the group’s Secretary General, David Wright, said in an interview in Brussels yesterday.
Price assessments could be prone to manipulation because traders participate voluntarily, meaning they may selectively submit only trades that benefit their positions, IOSCO said in October. Total said in a submission to the forum of global regulators that the published oil price is wrong “several times a year.”
The MOC process replaced a system where reporters made assessments based on volume-weighted averages. This methodology, favored by competitors including Argus Media Ltd., takes into account deals done throughout the day.
Platts moved away from this process because the company was concerned it could result in assessments that lag actual market levels and aren’t repeatable, Bassam Fattouh, director of the oil and Middle East program at the Oxford Institute for Energy Studies, said in a January 2011 report on oil pricing.
“It’s not going to be the death of benchmarks by any means,” said Phil Verleger, a former energy adviser to U.S. President Jimmy Carter and founder of consulting firm PK Verleger LLC in Carbondale, Colorado. “Hopefully, the government doesn’t get into trying to mandate a certain reporting system, because that would be a bad idea.”
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