11 Sep Boxing Clever

11/9/2014

Platts announced yesterday that the “Saudi Aramco Products Trading Company …. intends to take part in the Asia Platts Market on Close assessment process for fuel oil, gasoil, gasoline, jet fuel and naphtha swaps”.

Background

This is a curious development. It comes at a time when industry players remain under the shadow of investigation by the European Commission and the Federal Trade Commission for misrepresenting prices to Price Reporting Agencies (PRAs), particularly the Platts Market on Close (MOC) assessment process, i.e. the window.

Earlier this year the Oxford Energy Forum published a Consilience article entitled “Motive, Means and Opportunity1”. This looked at the different categories of actors in the market and considered which types of company might be motivated by high prices and which by low prices. Using my years of experience of reading trashy “whodunnits” I concluded that integrated oil companies have a tax motivation to under-state crude prices and over-state refined products prices. Using the simple means of non-arm’s length deals, the half hour pricing window provides an opportunity to have an impact on the prices that get published each day and which are picked up in term and spot deals globally.

But as any fan of Agatha Christie will tell you, having the motive, means and opportunity is no proof of guilt. The case that prices have in fact been manipulated is as yet not proven by the regulatory authorities. A New York class action complaint is attempting to establish that crude oil prices have been manipulated and it names a range of major oil companies and trading houses in the complaint.

Saudi Arabia’s Position

Then into this unsatisfactory situation steps Saudi Aramco, indicating that it will be involved in Platts’ MOC refined product pricing in future. The plot thickens!

According to the 2014 edition of BP Statistical Review Saudi Arabia as a country produced 11.5 million b/d of crude oil in 2013. It consumed 3.1 million b/d and had refining capacity of 2.5 million b/d in that year. So Saudi is net very long of crude and net short of products. Simplistically therefore Saudi may be said to better off when there are high crude oil prices and low refined product prices. On paper then, Saudi Arabia’s commercial interests look to be the diametric opposite of the major oil companies.

Saudi is believed to have been moderately active in refined product swaps for some time, so it is natural that it might be interested in participating in the MOC product price window. It would be a low-key way of checking out first-hand how the window operates in practice, given the wide spread unresolved allegations of manipulation that have been flying around over the last couple of years.

If we see Saudi Arabia stepping into the crude oil MOC window that would be more significant, particularly since the Saudis are believed not to participate in crude oil, forwards, futures or swaps.

Rumblings in the market are of the “if you can’t beat ‘em, join ‘em” variety, but that seems rather far-fetched to me. I can contemplate Saudi Arabia taking part in the window to ensure that its interests are not being undermined by others. That is a far cry from participating in the window to make sure that the number that gets published is the one you want to see.

Platts maintains its right to exclude from the MOC process any company that submits misleading data or does not stand by its bid or offer in the MOC process. This is termed “boxing”. For example Platts “boxed” some of the big US banks during the financial crisis in 2008. Platts’ right to box a company is one of the supporting planks on which the integrity of the MOC process depends.

The prospect of Platts being forced into the position of having to “box” Saudi Aramco is one which is causing some amusement in the market. This is definitely a situation to watch.

1 http://www.oxfordenergy.org/wpcms/wp-content/uploads/2014/01/OEF-94.pdf