The Battle of the Benchmarks

On 18^th September Platts reported that “The International Organization of Securities Commissions (IOSCO) on Thursday said that price reporting agencies had made its recommended operating principles an "integral part" of their practices and said it saw no more need for annual reviews of their implementation.”

Also on 18^th September Bloomberg reported that “Major oil companies including Royal Dutch Shell Plc and price publisher Platts were told by regulators to redact business secrets from documents obtained during antitrust raids in a sign the European Union may be moving ahead with a two-year-old probe..”

A quick recap for those who have not been following this story.

• The G20 Seoul Summit Leaders' Declaration on November 11 – 12, 2010, requested "the IEF, IEA, OPEC and IOSCO to produce a preliminary joint report, by the April 2011 Finance Ministers’ meeting, on how oil spot market prices are assessed by oil price reporting agencies (“PRAs”) and how this affects the transparency and functioning of oil markets". These four organisations appointed yours truly along with my good friend Dr. John Gault (“the Consultants”) to research and write the report requested by the G20. That report was confidential, but shortly after delivering the report Consilience made a public response to IOSCO’s consultation on the functioning and oversight of the PRAs.

• Consilience’s response said, amongst other things, “selective reporting of deals leaves the price reporting system wide open to abuse, particularly when non-arm’s length deals could be reported to the PRAs or transacted on the Platts e-window software as if they were arm’s length…” Consilience Response to IOSCO Consultation........

• IOSCO introduced its “Principles for Oil Price Reporting Agencies” in October 2012, pointing out that that IOSCO has a brief to consider the derivatives market, not the physical market. The prices that are taken up and used as a benchmark to set the value of the price in contracts around the world are physical/OTC forward prices. These prices are then used by the futures and derivatives market. The physical market itself is unregulated.

• The EC then rocked the market by launching its own investigation into oil prices and kicked off with a raid on the offices of BP, Platts, Shell, and Statoil in May 2013. Despite rumours of other companies being drawn into the investigation no formal statement of the EC’s findings has been forthcoming.

So that is the Sound of Another Shoe Falling

With this history in mind the Bloomberg story on 18^th September takes on considerable significance and is being regarded as the precursor to “the big reveal” by the Commission of against whom who they intend to take action and for what. The logic is that if the EC was planning to say that there was no case to answer there would be no need for redaction of documents, which was the step taken before the EC made a complaint against Google.   It remains to be seen if the EC will give Platts and the companies providing it with deal evidence as clean a bill of health as IOSCO appears to have given to the PRAs.

Those waiting with bated breath for an outcome must include the participants in a class action suit in the New York courts against a number of major oil companies alleging the manipulation of Brent.

What is Happening Now

What may or may not have happened in the past is all very interesting, but for market participants it is what is happening now with benchmarks that is the most immediate cause for concern. One consequence of the IOSCO and EC investigations is that many companies have shied away from giving any data to PRAs at all, in case it comes back to bite them in the future. The less data that informs assessments, the less objectively representative of the market are those assessments likely to be.

The Platts Dubai price assessment is the spinning plate most likely to fall first, although Singapore gasoline is also wobbling alarmingly.

The market was deeply worried in August when it became apparent that out of a total of 78 Dubai cargoes, 72 were held by China Oil, allegedly all purchased through the Platts e-window. [Oman and Upper Zakum are deliverable grades against the Dubai contract]

August Dubai Market

The price of Dubai leapt from $0.45/bbl below Brent to more than $2.50/bbl above Brent as this situation unfolded. Platts is consulting industry to establish whether the addition of a new grade, Al Shaheen, will dilute the Chinese power to play such a dominant role in the market. This is being seen by some as a sticking plaster for a haemorrhage.

But in the meantime the viability of Dubai as a benchmark is being further undermined by the disappearance of the trading houses and many of the major companies from the Dubai market. Refiners who are buying any oil anywhere based on the Dubai benchmark had better fasten their seatbelts. It’s going to be a bumpy ride.