European Commission investigating oil benchmark prices
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Officials want to see if companies are manipulating oil trades or data, to influence benchmark oil prices such as Brent crude
Alan Bailey Petroleum News
The European Commission, the executive branch of the European Union, announced on May 14 that its officials had conducted unannounced inspections at the premises of several companies involved in the oil industry in Europe. The commission said that it had “concerns that the 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.” The commission also expressed concern about the possibility that some companies might have prevented other companies from participating in the price assessment process.
According to several media reports oil companies being investigated consist of BP, Shell and Statoil. And, apparently, the “price reporting agency” under investigation is Platts, the division of McGraw Hill Financial that provides daily benchmark prices such as Brent crude and West Texas Intermediate. On May 20 the Financial Times reported that the commission had also requested information from several major commodity trading firms.
Widely used Oil benchmark prices are widely used in setting prices for a variety of oil related products, including various types of crude oil, refined oil products and biofuels — even small distortions in benchmark prices could have a large impact on the prices of these products, the commission said.
However, the commission commented that the fact that it is carrying out inspections does not indicated that any company is guilty of malpractice. There is no specific deadline for completion of the investigation and companies have the right to defend themselves in the event of any antitrust action, the commission said.
The investigation follows the 2012 Libor scandal, in which several prominent banks were found to have manipulated reported interbank lending rates for financial gain. That scandal has presumably left regulators particularly sensitive to the possibility of malfeasance in other high-impact financial reporting systems.
However, the reporting of a crude oil benchmark such as Brent involves a different process than did the reporting of Libor interest rates. In the case of Libor, bank executives were reporting their assessments of interest rates, based on an honor system involving trust in the integrity of the people involved. Oil price benchmarking, by comparison, involves the daily assembly of price data relating to actual oil trades.
Unregulated But, with the benchmarking process unregulated and billions of dollars at stake, the European Commission is clearly worried about the possibility of price manipulation through, for example, the execution of carefully timed bogus trades or the misreporting of trading data.
According to information published by Platts about its price assessment methods, the daily assessment of the Brent crude price, perhaps the most widely used of the oil price benchmarks, involves the gathering of data about trades in four North Sea crude oils: Brent, Forties, Oseberg and Ekofisk crudes. Brent crude, which originally was the only oil used for the benchmark, remains the primary crude in Platt’s Brent pricing formula. But, with Brent production having declined over the years, the reporting agency uses the other three crudes, all with similar oil compositions to Brent, as checks against the price of Brent oil itself become disconnected from the prices of similar crudes.
Market on close In pricing the oil Platts uses what is referred to as a “market on close” procedure, involving the gathering of data about oil trades that take place during a specified time window at the close of the appropriate oil market each day — in the case of the Brent price that pricing window in the London market lasts from 4:10 p.m. and 4:25 p.m. London time. In the absence of suitable trades Platts uses other indicators such a price differentials with other crude prices such as those of West Texas Intermediate, Platts says.
And to guard against attempts at benchmark price manipulation by a trader making a single trade at a high or low price, Platts tests whether a trader has made repeated trades at unexpectedly high or low prices, rather than executing just a single oddly priced transaction, Platts says in its published methodology.
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