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Crude Traders Stick With Brent Amid Manipulation Claims

Oct. 29 (Bloomberg) -- Bob Dudley, chief executive officier of BP Plc, discusses the company's third-quarter profit reported today, dividend increase and share buyback. He speaks in London with Ryan Chilcote on Bloomberg Television's "The Pulse." (Source: Bloomberg)

The alleged fixing of oil prices is unlikely to sway traders from using Brent as a benchmark for buying and selling oil in the $5.7 trillion commodity market, according to analysts and brokers from London to Tokyo.

Four energy traders claim in a lawsuit that some of the world’s biggest oil companies including BP Plc (BP/), Statoil ASA (STL) and Royal Dutch Shell Plc (RDSA) conspired with Morgan Stanley (MS) and energy traders such as Vitol Group to fix spot prices for Brent for more than a decade. The North Sea oil price as assessed by Platts, a unit of New York-based McGraw Hill Financial Inc. (MHFI), is used to price more than half the world’s crude including Australia’s Cossack, Malaysia’s Tapis and Castilla in Colombia.

“Brent is going to remain as the benchmark for the foreseeable future at least, because there is no real alternative to it at the moment,” said Osamu Fujisawa, an independent oil economist in Tokyo, who previously worked for 26 years at Shell and 17 years at Saudi Arabian Oil Co. “It’s very well established, and those who are exposed to it don’t really have a choice but to stick with it.”

The case is one of at least seven U.S. lawsuits alleging price fixing in the London-based Brent market. European Union antitrust authorities raided the offices of companies including Platts, BP and Shell in May amid allegations of collusion in setting prices of crude, refined products and biofuels. The probe comes as global regulators scrutinize financial measures around the world after fining banks about $2.5 billion for distorting other benchmarks.

Photographer: Chris Ratcliffe/Bloomberg

An oil tanker carrying crude oil is seen in the North Sea. Close

An oil tanker carrying crude oil is seen in the North Sea.

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Photographer: Chris Ratcliffe/Bloomberg

An oil tanker carrying crude oil is seen in the North Sea.

Antoine Colombani, a spokesman for EU Competition Commissioner Joaquin Almunia in Brussels, declined to comment on the U.S. lawsuit.

‘Pricing Function’

The oil companies and energy traders, which include Trafigura Beheer BV and Phibro Trading LLC, submitted false and misleading information to Platts, according to the proposed class action filed Oct. 4 in Manhattan federal court.

Phibro, a Westport, Connecticut-based unit of Occidental Petroleum Corp. (OXY), said it hadn’t been served in the lawsuit and the claims are without merit. Eric Moses, a Phibro spokesman, said the lawsuit appears to be related to the European investigation. “Phibro has not been a target of, or involved in, that investigation or any other related investigation,” Moses said.

Not Uncommon

Representatives of Shell, Vitol, Trafigura, Morgan Stanley and BP declined to comment on the latest suit. Morten Eek, a Statoil spokesman, said it isn’t “uncommon” that private U.S. lawsuits filed follow probes by governmental agencies, declining to comment further.

“This kind of issue is not so new, prices can be moved by some big traders,” Ken Hasegawa, an energy-trading manager at Newedge Group in Tokyo, said by phone. The market still needs to use Brent and New York’s West Texas Intermediate oil benchmark because of their “huge pricing function,” he said.

The suit provides an insight into physical commodity markets, one of the less-transparent corners of global trading, where spot trading is largely private. By contrast, stocks and futures transactions are conducted on regulated exchanges with prices visible to all.

Platts’s methodology “can be easily gamed by market participants that make false, inaccurate or misleading trades,” the plaintiff traders alleged. Brent, Forties, Oseberg and Ekofisk crudes collectively make up the spot price benchmark known as Dated Brent.

‘No Change’

There has been “no change” in participation in Platts’s price discovery process since the allegations or probe, according to Kathleen Tanzy, a New York-based spokeswoman. Platts was not named in the lawsuit, she said in an e-mail.

Bloomberg LP, the parent of Bloomberg News, competes with Platts and other companies in providing energy-markets news and information.

Asian state oil companies such as Malaysia’s Petroliam Nasional Bhd., Indonesia’s PT Pertamina and Vietnam Oil & Gas Group, all of whom use Dated Brent when buying or selling crude, are unlikely to move away from the benchmark, Hasegawa said.

Petronas, as the Malaysian producer is known, will continue to use Brent in its oil pricing, the company said last month. Azman Ibrahim, a spokesman in Kuala Lumpur, declined to comment in an e-mail today on whether the company’s position had changed. It’s up to Pertamina whether it continues to use Brent when importing crude, Widhyawan Prawiraatmadja, an official from Indonesia’s oil and gas regulator, SKK Migas, said by phone from Jakarta. A Pertamina spokesman didn’t respond to a phone call or text message seeking comment.

Using Brent

“The process of benchmarking to Brent has worked well so far,” S. Varadarajan, the chairman of Bharat Petroleum Corp. (BPCL), India’s second-largest state-run refiner, said by phone from Mumbai. “I don’t know how sustainable it will be to switch to a new benchmark for all the sweet-crude contracts we have. The current system has kind of stabilized for many years now.”

In a Bloomberg News survey conducted this year, commodities traders expressed skepticism about benchmark prices, with 85 out of 270 traders and analysts surveyed saying they have little confidence in the assessed prices of crude, metals and iron ore. Last year, the International Organization of Securities Commissions issued a report saying benchmarks published by Platts and others remain vulnerable to manipulation.

Reporting Trades

Companies don’t have to report all of their trades to Platts. Instead, it bases assessments on bids, offers and sales submitted by instant messages, phone calls and its electronic platform. Platts reporters monitor the buying and selling of cargoes until 4:30 p.m. London time when the window closes, and the editorial staff calculate the day’s price.

“I don’t expect significant changes in the market” because of sufficient futures liquidity, Andrey Kryuchenkov, an analyst at VTB Capital in London, said by phone yesterday. “The Brent price discovery mechanism wasn’t invented out of the blue, it has been developing for a long time, from the 1980s.”

The alleged manipulation will also probably have little or no impact on WTI futures, said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy.

“It’s a bit of a stretch to say this will have an impact on the trading of WTI or Brent exchanges,” Kilduff said by phone yesterday. “The spot market doesn’t provide the uniformity or liquidity that the exchanges provide. It’s hard to know what’s going on with the spot market.”

WTI Spread

One “small” way the manipulation would “potentially” have an effect is on the price differential between the two grades of crude, Phil Flynn, senior market analyst at Price Futures Group in Chicago, said by phone yesterday. Investors trade the spread between Brent and WTI on the ICE Futures Europe exchange, where the volume of a contract tracking the differential rose to a high for the year of more than 80,000 contracts on Oct. 23. Spread trading can also involve simultaneously buying a separate contract for one commodity and selling another at a fixed price.

Brent for December settlement fell $1.78, or 1.7 percent, to $103.46 a barrel on the London-based ICE Futures Europe exchange, down 6.9 percent this year. It was the lowest Brent close since July 1. WTI slipped 60 cents, or 0.6 percent, to $94.20 on Nymex, leaving it up 2.6 percent this year. The U.S. benchmark was at a $9.26 discount to Brent. It slipped to a $23.44 discount on Feb. 8 before moving to an 8-cent premium during trading July 22.

“There has been an understanding in the market that you are OK as long as you follow Platts’ methodology,” said Shohei Setoh, a Tokyo-based shipping manager at JX Nippon Oil & Energy Corp., a unit of Japan’s biggest oil refiner. “There also has been concern for long time that those Platts window trades could be manipulated. But it wasn’t easy for market participants to just walk away from Platts because there are no alternatives.”

To contact the reporters on this story: Mark Shenk in New York at mshenk1@bloomberg.net; Pratish Narayanan in Singapore at pnarayanan9@bloomberg.net

To contact the editors responsible for this story: Dan Stets at dstets@bloomberg.net; Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net

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