Are Oil Prices Rigged?
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Days after news of the LIBOR scandal broke, a report commissioned by the G20 warns that oil prices could be rigged by traders as the current system of oil price reporting is “susceptible to manipulation or distortion.”
According to the report by the International Organisation of Securities Commission, an inquiry has revealed a “variety of issues” over the way oil spot market prices are determined and how it ultimately affects the “transparency and functioning of oil markets.”
Days after news of the LIBOR scandal broke, a report commissioned by the G20 warns that oil prices could be rigged by traders as the current system of oil price reporting is “susceptible to manipulation or distortion.”
According to the report by the International Organisation of Securities Commission, an inquiry has revealed a “variety of issues” over the way oil spot market prices are determined and how it ultimately affects the “transparency and functioning of oil markets.”
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Oil prices are determined via what the BBC describes as “system of trust”. In particular, traders at various institutions, such as hedge funds, banks, and energy companies, voluntarily report the prices they pay for their oil contracts to oil price reporting agencies (PRA), which then utilise the price information to determine the market benchmark oil price.
In striking similarity to LIBOR – the interest rate measure that Barclays was earlier found to have rigged – this process is unregulated and relies on the integrity of firms to reveal accurate information of all their trades.
The IOSCO commented:
[quote] This creates opportunity for a trader to submit a partial picture, that is, an incomplete set of trades in order to influence the assessment to the trader’s advantage. [/quote]
Trillions of dollars worth oil contracts are traded daily based on these benchmark prices which in turn impacts the prices consumers pay for gasoline and energy.
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However, Platts, the largest of the PRAs, argued there is “absolutely no similarity” between Libor and oil as they employ journalists to weed out data that appear suspicious or spurious.
Furthermore, Platts insist that inter-PRA competition allows for independent pricing and provides “fundamental differences” from LIBOR, which is regulated by a single body, the British Bankers’ Association.
Yet, the IOSCO points out this system is heavily reliant on the “experience and training” of journalists to make a judgement about what the oil price should be.
Hitting back on claims that prices are open to distortion, Platts said:
[quote] Platts and other Independent Price Reporting Organisations have no vested interest in the markets they cover. We are subscription-based companies and never pay in any fashion for market participants to submit data to our assessment processes. [/quote]Calling for “barriers or firewalls to minimise contamination risk of information”, Simon Lewis, chief executive of Global Financial Markets Association, wrote in an open letter to the IOSCO:
[quote]There is potential for conflicts of interest to arise where PRAs engage in revenue generation, price reporting and news services on oil markets, as incentives may arise to favour those who pay greater subscriber fees or provide greater access to market information. [/quote]Related Story: The Fear Premium Is Driving High Oil Prices: Nouriel Roubini
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