Europe’s Regulators Pry Open the Oil Market

Authorities are questioning how price benchmarks are set | “We have no view or surveillance into what they do”

Asjylyn Loder, Stephanie Bodoni, and Rupert Rowling

Regulators “have a hammer, and they’re going around looking for nails to pound with it”

Statoil sold a tanker of Norwegian crude valued at about $63 million to BP on May 9. That transaction, which wasn’t subject to any oversight by financial authorities, would help set the price of more than half the world’s oil. The deal was reported to Platts, a unit of McGraw Hill Financial, which uses information from traders and others involved in the market to set benchmarks for oil and related products. Platts’s figures help determine the price refiners pay for crude, which in turn affects what consumers pay for gasoline and diesel fuel.

On May 14, Europe’s top antitrust official, European Union Commissioner for Competition Joaquín Almunia, upended this lightly regulated corner of the market, raiding the offices of Royal Dutch Shell, BP, and Statoil and requesting records from some of Europe’s biggest trading houses.

Almunia and his investigators are looking into the process Platts uses to compile its price benchmarks to determine whether the oil companies colluded to manipulate them. Over the last two years regulators around the world have scrutinized global pricing benchmarks including the London interbank offered rate, or Libor, which is widely used to set short-term rates, and ISDAfix, the benchmark for the $379 trillion interest-rate swaps market. Regulators “have a hammer, and they’re going around looking for nails to pound with it,” says Craig Pirrong, director of the University of Houston’s Global Energy Management Institute. “Libor showed them how powerful a hammer they had, and in particular it showed them what can happen when you get access to company records. It’s amazing the kinds of things you can find there.”

U.S. and U.K. regulators used traders’ e-mails and instant messages to uncover widespread attempts by banks to manipulate Libor. Royal Bank of Scotland Group, UBS, and Barclays have been fined about $2.5 billion, and at least a dozen other companies remain under investigation.

“We continue to think that price assessment organizations must be able to retain editorial control of their methodologies and criteria,” says Dan Tanz, Platts vice president of editorial. Spokesmen for BP, Shell, and Statoil declined to comment. Bloomberg LP, the parent of Bloomberg Businessweek, competes with Platts and other companies in providing energy markets news and information.

Oil market participants have called into question the accuracy of Platts’s benchmarks. In an August letter to the International Organization of Securities Commissions, Total Oil Trading, an arm of French oil company Total, said Platts’s prices are “out of line with our experience” several times a year.

Commodities regulators in the U.S. and Europe lack jurisdiction over the trades that underlie the benchmarks. Those transactions are deemed “forwards,” or bilateral trades that provide for physical delivery between commercial parties, such as an oil producer and refiner, and are exempt from regulation. “We have no view or surveillance into what they do,” says Bart Chilton, a commissioner on the U.S. Commodity Futures Trading Commission. “We’ve tried. We’ve been rebuffed in court. So there definitely needs to be more transparency.”

Almunia isn’t subject to those legal limits because he’s conducting an antitrust investigation, one of the most powerful enforcement weapons in the European regulator’s arsenal. His approach is “not only creative, it’s encouraging,” says Chilton. “Ultimately, these prices that are being posted impact consumers around the world. It’s a big hairy deal.”

As investigators plow through 11 years of instant messages, phone records, and e-mails, the inquiry could broaden, according to the University of Houston’s Pirrong. Dozens of oil companies, banks, hedge funds, and trading houses submit data to Platts. “It has a lot of people nervous,” says Pirrong.

The bottom line Europe’s competition commission suspects collusion in the process used to set reference prices for oil.


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