Oil markets: The danger of distortion

FT analysis of the European Commission’s investigation into oil price fixing (see previous post). Highlights below:

In July 2013, the European Commission carried out a number of raids across Europe in an effort to gather evidence of price fixing in oil markets. Along with the oil majors BP, Royal Dutch Shell and Statoil, and the Dutch trader Argos Energies, officials raided the headquarters of Platts, a price reporting agency.

The raids came as government debate whether there is a need to supervise the unregulated trade of oil, and have also stoke the fires of fear among people that the market will only become less transparent if traders refuse to co-operate with price reporting agencies.

The FT explains how price reporting agencies might pose a problem:

“Platts reporters monitor bids and offers for products from the blends that make up Dated Brent – the international crude benchmark – to jet fuel. Each day they publish prices or “assessments” that are used by traders to price oil deals worldwide.

 “A Platts assessment underpins the Brent futures market, used by airlines to protect against price moves and by hedge funds to speculate; the British government uses Platts assessments to calculate taxes on oil producers; and ultimately Platts’ prices play a part in the cost of petrol at the pump. Traders say that gives Platts great power.”

However, some companies do not co-operate with price reporting agencies: If no transactions take place in a market on a given day reporters have to estimate prices based on quotes, introducing a subjectivity to the process that is unpopular with regulators after Libor.

In addition to examining access, investigators are looking for evidence of price rigging. This might involve attempts to move a price up or down by a tiny amount, for example, by submitting unrealistic bids or offers or concluding transactions away from the prevailing price. Platts says its price reporters disregard prices unrepresentative of the market, making it hard for contributors to manipulate its assessments.

Please read full article at: http://www.ft.com/cms/s/0/7790d128-e953-11e2-9f11-00144feabdc0.html#axzz2b5IIMkt8

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