RIYADH: In the biggest cross-border action since the probe into rigging of Libor benchmark interest rates, the European Commission raided the offices of oil majors Statoil, Royal Dutch Shell and BP, and interestingly, the London bureau of pricing agency Platts.
The European Commission said raids were made over concerns that “companies” that it did not name, “may have colluded in reporting distorted prices to a price-reporting agency to manipulate the published prices” for oil, refined products and biofuels, adding that it had concerns that “companies may (also) have prevented others from participating in the price assessment process, with a view to distorting published prices”.
Brussels later also asked for information, related to oil benchmarks from Eni, the Italian oil major, and from Finnish refiner Neste Oil. And widening the net still further, new information was also sought from trading houses Glencore, Vitol, Gunvor and Mercuria, and possibly others too.
The net is definitely widening.
And this ongoing, current probe is being undertaken only months after one of Europe’s largest energy trading groups warned of “inaccurate pricing” of crude and oil products.
Late last year, Iosco, the umbrella group of financial regulators, Iosco argued in an internal report that “the recent Libor settlements illustrate the vulnerability of [energy] benchmark setting processes to potential manipulation”.
In a brief statement after the raid, Statoil later said that the “suspected violations” were related to the way prices for crude oil, refined oil products and biofuels are assessed by Platts in a process known as “market-on-close.”
Royal Dutch Shell PLC said it does not know what exactly European Union regulators were investigating in a probe of the oil market, beyond what has been disclosed in public statements, the company’s Chief Financial Officer, Simon Henry said.
However defending Platts, Henry said: “The Platts mechanism provides great transparency of the trades that take place in the window,” he said, referring to Platts daily trading window used to assess market prices.
The system is as transparent as it could be given that the physical oil market is so complex and covers many different grades of crude and refined oil products, some of which are infrequently traded, he added.
Platts, relies heavily on bid and offer quotes, as well as actual transactions, to assess prices.
While putting the scale of the growing scandal in some perspective, The Economist says ‘the volumes of oil and products linked to these benchmark prices (submitted to Platts) are vast. Futures and derivatives markets are also built on the price of the underlying physical commodity.
At least 200 billion barrels a year, worth in the order of $20 trillion, are priced off the Brent benchmark, the world’s biggest, according to Liz Bossley, chief executive of Consilience, an energy-markets consultancy.
The commission has said that even small price distortions could have a “huge impact” on energy prices. Statoil has said that the commission’s interest goes all the way back to 2002. If it is right, then the sums involved could be huge, too.
Interestingly in 1991, Jorge Montepeque, the Platts man then in Singapore who as per Tim Bower in, ‘The Squeeze’ distrusted the oil industry, set out to create a transparent, honest oil market.
And interestingly this self appointed policeman of oil trading had a love–hate relationship with Laney Littlejohn, the then Senior Economist at Saudi Aramco in Dhahran, who was entrusted to work out a pricing of Saudi crude for its customers. And in the meantime, market manipulation continued.
Artificially low or high prices were listed in the Platts window to establish the threshold of a dishonest trade.
Many attempted to set an artificially high price for a contract with a third trader; a variation is called ‘buying through the offer’ or ‘selling through the bid’ to set an artificially high or low price. The ‘invisible hand’ continues to extract a price from the consumers to this day.