Bankers’ accusations of trader price-rigging are fuelled by revenge — the real fixers are in OPEC
The bankers have finally got their revenge. Oil traders claim that influential bankers, furious that that their sector has been squeezed by regulators since the 2008 crash, have persuaded Brussels that oil traders should no longer be able to operate without the same rigorous rules. According to the bankers, oil traders behave worse than money brokers. And so the Eurocrats raided the offices of BP, Shell and Platts, comparing their investigation into oil price-rigging with the one into the bankers’ Libor scandal. By focusing on Platts, an unusual reporting agency whose methods to discover the price of oil often provoke accusations of dishonesty, the Eurocrats have won public sympathy and the gratitude of those banks who host massive oil—trading operations.
Over the past century, the repeated charge is that oil prices have been rigged by oil traders, refiners or producers. At its simplest, traders are alleged to either flood or squeeze markets to fix prices to grab a quick profit. Undoubtedly some traders have been dishonest, and U.S. regulators have charged a handful of traders for manipulation. But their alleged crimes were short-lived and simple to detect. The current suggestion that BP, Shell and Platts have been conspiring for 10 years to manipulate oil prices — possibly the Brent market in the North Sea — is mind-boggling.
Dynamics of pricing
Setting the price of oil is fiendishly complicated. Unlike the price of gold or BP shares, oil’s value is not fixed in one open stock market. Crude oil is not only traded on regulated markets in New York and London but also around the clock in thousands of opaque markets. Like wine and cheese, the quality and value of crude oil varies significantly, and this is reflected in its price, as are many other factors. The difference in price also depends on the distance between the oilfields and refineries in three locations: Oklahoma, the North Sea and Dubai, as well as other factors such as whether the oil is for immediate delivery or in the future. Every day, tens of thousands of anonymous traders across the globe are secretly agreeing prices worth trillions of dollars. A market can only work if traders, including their dishonest brethren, know what prices their competitors have agreed. Since 1909, traders have increasingly relied on Platts, owned by McGraw-Hill, the U.S. publishers.
Platts reporters call hundreds of producers and traders every day to discover their purchase and selling prices. Unscrupulous traders lie to manipulate the market, but even the best manipulator can only fool the market for a couple of days yet often takes advantage of an incompetent Platts reporter. Some of the most aggressive traders suspected of speculation are global commodity trading giants who are beyond the Eurocrats’ reach. And so the bankers are angry.
In a world of squeezes and deception, bankers’ oil-trading has shifted the balance. Over the last 20 years, Morgan Stanley’s sophisticated trading has become colossal speculation. Markets have witnessed huge crashes following crazy speculation to manipulate the oil market. But while U.S. investigators have repeatedly accused honest speculators of causing phoney price increases, they have also failed to find convincing evidence of a conspiracy. After Morgan Stanley’s traders suffered huge losses in 2008, Platts declared its price reporting was unacceptable. The bank protested that there was no evidence of wrongdoing but to its distress was excluded by Platts from the system for a period. Now bankers protest that oil traders and Platts should be regulated like them.
The Platts system is imperfect, but no alternative has been found. Whatever transgressions the Eurocrats might discover are inconsequential compared to the world’s mammoth price-fixer, OPEC. Every day, the oil producers who claim to control about 80 per cent of the world’s oil restrict their production to keep prices artificially high. This group is too powerful to challenge. No one in Washington or Brussels can order the Saudis or Venezuelans to produce more oil or charge a fair price. Instead, Saudi officials in Dhahran unilaterally impose the highest price they can extract. Stymied by OPEC, the Eurocrats have gone for smaller fish. Like the U.S. regulators, they will at best emerge from the treacle with a minnow. (Tom Bower is author of The Squeeze: Oil, Money and Greed in the 21st Century.)
— © Guardian Newspapers Limited, 2013