EU oil manipulation probe shines light on Platts pricing

Price Assessments

Kathleen Tanzy, a Houston-based spokeswoman for Platts, said the company didn’t have anything to add beyond its confirmation yesterday that the European Commission has undertaken a review at its office in London in relation to its price assessment process and that Platts is fully cooperating with the review.

U.K. Deputy Prime Minister Nick Clegg said allegations of price fixing in the oil market are “incredibly serious,” while answering questions in Parliament.

The Market-on-Close methodology was introduced to Asian refined oil products trading in 1992 and broadened to the international crude market in 2000, according to Platts’s website. The principle of the MOC is that Platts determines prices at a particular time, for example 4:30 p.m. in London.

Platts Window

Assessments are based on transactions during this trading window with deals done nearest to the cut off given precedence over those earlier in the day. If there’s no trade, bids or offers are used as an indicator of where companies were willing to buy or sell. All Platts customers can view the window and any registered company can post bids and offers.

Traders typically communicate information to reporters via instant messenger or telephone. Companies are under no obligation to report trading activity or partake in the MOC process. Platts also has no legal authority over them. If a company does not adhere to the rules or perform on a trade that it reported in the MOC, Platts can refuse to recognize its bids, offers or trades in the assessment process. The risk of not participating is that the company loses influence over the setting of prices.

The MOC process replaced a system whereby reporters made assessments based on volume-weighted averages. This methodology, favored by competitors including Argus Media Ltd., takes into account deals done throughout the day. Platts moved away from this process because it was concerned it could result in assessments that lag actual market levels and aren’t repeatable, Bassam Fattouh, the director of the oil and Middle East programme at the Oxford Institute for Energy Studies, said in a January 2011 report on oil pricing.

Beyond Crude

The influence of price reporting companies stretches beyond crude and oil products. The assessments published by Platts and its competitors including Argus and ICIS, a unit of Reed Business Information, are used to price the raw materials used in the $2.2 trillion global base chemical industry as well as coal, power, metals, emissions, liquefied natural gas and shipping rates.

While some traders of energy commodities such as crude, fuel oil and diesel are willing to be identified by the price reporting services, the companies buying and selling in less transparent markets such as polyethylene, coal, LNG and metals typically provide information on the understanding their identities and those of their counterparties won’t be published.

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