Echoes of LIBOR

French oil company Total says agency’s method manipulates benchmark pricing

October 11, 2012
Obsession
Energy Shocks
October 11, 2012

France’s Total has made a rare, open attack against energy pricing company Platts, asserting that the latter’s system for setting physical oil prices is erratic and does not always reflect the state of the market. Total’s complaint, made in a letter released Oct. 9, resembles allegations about Libor, the benchmark interest rate governing many loans and bonds that regulators say was manipulated by Barclays and possibly other banks. In June, Barclays paid a $450 million fine.

As with Libor, the price of physical oil shipments is set in an insular, clubby atmosphere whose players do not discuss the underside of the system outside the room. The world learns about the price of physical oil, versus futures, only because private agencies call around to big trading houses like Glencore asking the price of their latest shipments. In June, traders revolted (paywall) and threatened a reporting boycott when financial regulators recommended a more transparent system. If the boycott was carried out, it could have triggered chaos in one of the world’s most important businesses. The recommendations were abandoned.

Against that backdrop, Total’s assertions stand out.Total said that price rating agencies “deform the real price levels paid at every level of the price chain, including by the consumer.” Specifically, the letter said, Platts at times posts different prices from everyone else in the market–higher when the group is lower, and lower when everyone else is higher. Platts, owned by McGraw-Hill, handles 85%-90% of the world’s pricing of physical crude, Total said. The other lead agencies are Argus Media and ICIS, a unit of Reed Elsevier. The prices they report have a chain reaction around the world. The Brent benchmark, for example, tied to a UK-produced grade of crude oil, is the lodestar for up to 70% of the world’s petroleum including the output of Saudi Arabia, Venezuela, and Russia. The prices set for these crude types go on to influence the pricing of futures, and ultimately affect the price of gasoline at the pump.

“Platts … imposes a methodology that does not furnish a market price (based on the day’s prices) but rather a price to the market,” Total said in the letter to the International Organization of Securities Commissions (IOSCO), a group of financial regulators.

In terms of impact on the global market, Total said the pricing problems can hurt the health of companies in the industry, but do not threaten the global financial system because the daily rate of trading, at less than $250 billion, is far below the scale of banking transactions. “Margins for refiners and retailers as well as prices for end-users are directly impacted by erroneous prices,” the company said. “ … [But] given the size of the oil market relative to the rest of the financial market, the overall impact of such shifts is not likely to threaten the integrity of the financial system.”

IOSCO released the letter, dated Aug. 24, as part of a report ordered up two years ago by the Group of 20 nations in an investigation of whether the currently unregulated market, which governs hundreds of billions of dollars in trades every day, needs tighter supervision. As a group, the pricing agencies have recommended a voluntary “code” of conduct.

Platts denies the accusations. In an emailed comment, the company said, “Platts does not conduct price estimates, but rather assessments based on concrete market data including bids, offers and transactions. The assessments are reflective of the values prevailing at the close of the trading day and individual companies may experience varying prices at different times due to normal market volatility.”

The statement went on: “Our assessment criteria are reflective of standard commercial practices and engagement with all market sectors including producers, traders, refiners and consumers. Platts is committed to publishing price assessments that reflect true market value and our price assessments are underpinned by highly structured methodologies aimed at ensuring the integrity of the assessment processes and the price assessments those processes produce.” Platts said its full remarks about the IOSCO report are posted here.

But Platts’ system is problematic because it surveys prices in only a narrow window of time, said Jamie Webster, head of market intelligence for PFC Energy, a Washington-based energy consultant firm. “This was always a risk in my mind as you could trade all day in one way and then change your behavior during the pricing window, potentially leading to skewed assessments,” Webster told me in an email. “This is counter to Argus methodology, which uses a longer period for assessment.”

Total’s accusations underscore the advantage of the scoring of prices in a publicly traded system, said Phil Flynn, an analyst with the PRICE Futures Group. He suggested that even if the price of physical oil can affect futures, the system of public trades ultimately helps to protect the integrity of prices. “That’s why you really see the importance of futures markets,” Flynn said. “When buyers and sellers with money on the line trade that is how you get your best price discovery.”

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