Two weeks after Royal Dutch Shell Plc and Platts changed the way more than half of the world’s crude is valued, the companies along with BP Plc and Statoil ASA are being probed by European antitrust regulators about potential manipulation of oil prices.
The investigation by the European Commission shines a light on how price reporting companies including Platts, the energy news and data provider owned by McGraw Hill Financial Inc., help determine the cost of raw materials used in everything from plastic bags to jet fuel. 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.
“The industry has developed a high degree of reliance, you can almost call it dependence, on price reporting agencies,” said John Driscoll, the managing director of JTD Energy Services Pte., a Singapore-based energy advisory, and former trading manager at GS Caltex. “They have tremendous discretionary power in their ability to interpret and publish prices.”
Platts has been assessing the cost of oil since at least 1923 when its founder, Warren Platt, started Platt’s Oilgram, a daily newsletter devoted to prices and market information. The influence of reporting companies has grown since the mid-1980s when the industry began using market prices instead of a system where they were set by international oil companies and the Organization of Petroleum Exporting Countries.
The assessments made by reporting companies underpin long-term contracts, short-term, or spot transactions, futures settlements and derivatives. Total SA, Europe’s third-biggest oil company, estimates as much as 80 percent of all crude and oil product deals are linked to reference prices including those published by Platts, while as much as 20 percent use trades on the New York Mercantile Exchange or ICE Futures Europe.
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.
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 Market-on-Close window, a process in place since 1992 and used only for selected products that have industry-agreed specifications. The second method involves employees discussing prices with market participants each day 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 in a forum for all to see. The principle of the MOC is that Platts determines prices at a particular time, for example 4:30 p.m. in London.
European regulators haven’t specified the markets they are probing or the pricing methods in question, saying only that “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.”
U.K. Deputy Prime Minister Nick Clegg said allegations of price fixing in the oil market are “incredibly serious,” while answering questions in Parliament.
Kathleen Tanzy, a Houston-based spokeswoman for Platts, today said the company didn’t have anything to add beyond its confirmation yesterday that the European Commission has undertaken a review at its office in London in relation to its price assessment process.
Traders typically communicate information to reporters via instant messenger or telephone. Companies are under no obligation to report trading activity or partake in the MOC process. Platts also has no legal authority over them. If a company doesn’t adhere to the rules or perform on a trade that it reported in the MOC, Platts can refuse to recognize its bids, offers or trades in the assessment process. The risk of not participating is that the company loses influence over the setting of prices.
Only Platts customers can view the window and any registered company can post bids and offers.
The MOC process replaced a system whereby 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 it 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.
The influence of price reporting companies stretches beyond crude and oil products. The assessments published by Platts and its competitors including Argus and ICIS, a unit of Reed Business Information, are used to price 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.
While some traders of energy commodities such as crude, fuel oil and diesel are willing to be identified by the price reporting services, the companies trading in less transparent markets such as polyethylene, coal, LNG and metals typically provide information on the understanding their identities and those of their counterparties won’t be published.
High-volume contracts such as North Sea Dated Brent are well-supplied with data from traders. Other markets rely on reporters calling companies to gauge price levels, and depend on their sources being honest when they report their views. For commodities that are not traded or reported every day, price assessors can take into account information such as feedstock costs to determine the price at which trades would take place theoretically.
“Market participants are under no legal or regulatory obligation to report their deals to price reporting agencies or any other body,” Fattouh said in the report. “Whether participants decide to share information depends on their willingness, their reporting policies and their interest in doing so.”
Platts said in March it would introduce a quality premium for Ekofisk and Oseberg crudes, two of the four crude grades that make up the Dated Brent marker used to price more than half the world’s oil. The changes, which started on May 1, were designed to boost trading liquidity and to take into account their superior quality over the other two grades, Forties and Brent, which make up Dated Brent, Platts said at the time. That came after Shell made adjustments to its trading contract.
The European investigation marks the third time global pricing benchmarks have drawn the regulators’ scrutiny in the past year following investigations into bank manipulation of the London interbank offered rate, or Libor, and ISDAFix, the benchmark for the $379 trillion swaps market.
The International Organization of Security Commissions concluded in October that price assessments could be vulnerable to manipulation because traders participate voluntarily, meaning they may selectively submit only trades that benefit their positions. Total said in a submission to the forum of global regulators that the published oil price is wrong “several times a year.”
Argus and ICIS joined Platts in publishing a self-regulatory code in April 2012 in response to Iosco’s findings.
Iosco, as the securities group is known, is checking if the industry has met standards designed to counter the threat of market abuse, Secretary General David Wright said in an interview today. The Madrid-based group drew up the rules last year, saying they were needed to wipe out “vulnerabilities” that leave the door open for market abuse.
“Negative media coverage and fears of heightened reputational risk could cause more major trading companies to withdraw from the price reporting process, and that in turn will reduce transparency in the opaque OTC wholesale energy markets, potentially compromising the effectiveness of pricing companies,” Roderick Bruce, an analyst at IHS Energy in London, said in an e-mailed statement.
Statoil is taking the investigation “very seriously” and cooperating to the best of its ability, Chief Executive Officer Helge Lund said today in an interview in Harstad, Norway.
Lund said he’s been given “very limited” information about which products and markets are being investigated, adding that it’s “important to underline that this is a suspicion, not a conclusion.”
Bloomberg LP, the parent of Bloomberg News, competes with Platts and other companies in providing energy markets news and information.