Challenging domination of oil’s powerful few

May 15, 2013 8:05 pm

Challenging domination of oil’s powerful few

By Ajay Makan in London

For decades the physical oil market has been the unregulated preserve of a few powerful companies. But in the wake of the Libor scandal, it is subject to intense scrutiny. Energy companies including BP, Royal Dutch Shell and Statoil, the majors raided by the European Commission on Tuesday in a probe into possible price rigging, have long dominated the trade. A handful of large commodity trading houses, hedge funds and investment banks are the other big participants. The market is not overseen by governments or exchanges, but by companies such as Platts, a price reporting agency (PRA) which publishes daily assessments that are gospel in the world of physical commodities. That gives Platts, a unit of the New York-listed McGraw Hill Financial, which was also raided on Tuesday, huge influence. According to Platts, its daily assessment of dated Brent, as the physical North Sea oil market is known, is the reference price for 60 per cent of crude traded worldwide. Dated Brent also underpins exchange-traded derivatives used by airlines to hedge prices and, along with taxes, Platts’ crude and product prices determine the price of petrol at the pump. The power of Platts has not gone unnoticed.“Some market participants expressed frustration that there is no one to whom they can appeal when they believe a PRA’s judgment is wrong,” Iosco, the umbrella body for global regulators said in a report to G20 finance ministers in 2011.

In the wake of the scandal over manipulation of interbank lending rates, Iosco went further, writing inits final report last year: “The recent Libor settlements illustrate the vulnerability of benchmark setting processes to potential manipulation.”

Price reporting agencies reject comparisons with Libor, where sponsors mechanically accepted daily estimates from banks.

Platts prides itself on knowing the oil market better than anyone else. The company says its reporters rigorously scrutinise company data, and speak to traders and back-office teams before deciding whether specific trades truly reflect the market. It also can, and regularly does, ban companies from submitting quotes.

However, market participants point to several reasons why prices can still be manipulated.

The market is fragmented by region, and into different products and crude blends. It is therefore highly illiquid. Companies are under no obligation to provide data to companies such as Platts, and some do not. The accuracy of the price also depends on the skill, or experience, of a price reporter.

Platts assesses prices in a short trading window, which may encourage companies to hold back their sell orders to the end of the day, creating downward pressure on the assessed price. The temptation, and potential payoff, from influencing markets is huge.

“The number of deals in the Platts window is small compared to the volume of product that gets priced off them, and that’s what creates the potential for conflicts of interest. For a trader it may not even seem like cheating [to influence the market] its just optimising your book,” said one market participant.

Despite these very public concerns, regulators have stopped short of formal regulation of price reporting agencies.

One problem has been lack of authority. The UK’s Financial Conduct Authority, for example, does not regulate physical commodity markets and would require evidence that manipulation of physical prices has influenced derivative contracts to become involved.

Another concern is that regulatory scrutiny would lead traders to stop speaking to price reporting agencies. That could lead to a nightmare scenario where the PRAs’ benchmark prices are undermined, without any viable alternative in the market.

That fear has been partly borne out in the gas market. Several companies have stopped reporting European gas prices to Platts, and its rival PRAs, Argus and ICIS Heren, since the FCA began to investigate allegations of manipulation of UK gas prices last year.

On Tuesday some traders said they planned meetings to discuss the way they share data with Platts once more information about the commission’s concerns is available. At least one lawyer had also been given instructions by a company in relation to the investigation.

But BP, Shell and Statoil all participated in the Platts market on close process as normal on Tuesday and on Wednesday, according to people involved in the process.

Statoil, one of the companies which has stopped reporting gas prices to PRAs, said it had no plans to stop contributing to Platts’ oil price assessments. An executive at another market participant said he would also be reluctant to do so as it would mean losing any influence over prices. BP and Shell declined to comment.

Additional reporting by Alex Barker, Javier Blas and Brooke Masters

 

Raids are opening shot in complex inquiry likely to take years

 

This week’s raids are the opening shot of a cartel probe that will likely stretch for three to five years if evidence of illegal activity is found. The process is complex and deliberately shrouded in secrecy, meaning the exact focus is hard to determine at this early stage, even for those under investigation, writes Alex Barker.

Most EU cartel probes involve a cartelist raising the alarm in a bid for immunity. But surprise inspections can be triggered by complaints from rivals, a tip-off from a disgruntled employee, or the Commission’s own initiative.

Lawyers note that the Commission’s decision to confine their inspections to three oil groups, while sparing traders and groups such as ENI and Total, suggests the action is based on specific intelligence, likely from an insider.

Once an investigation is launched, subjects of the probe are typically in a race to apply for reduced fines, if they uncover evidence of potential wrongdoing in their own internal investigation. The Commission offers the whistleblower immunity and the first leniency applicant up to 30 per cent off the eventual fine.

The Commission tends to keep targets of the investigation in the dark, especially until charges are served, which usually takes at least 18 months.

Few details are shared about the probe and companies are not told whether any rivals have applied for immunity or reduced fines, in a bid to bluff companies into cooperation even when there are few advantages.

Unlike financial regulators in the Libor case, who have settled with individual companies, the Commission waits until its case concluded with all parties involved.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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