You may remember that one of THE key financial metrics was manipulated for fun and profit by key insiders, at the expense of the muppets (insider term for you and me).
Now the shadow of su ion has fallen on a potentially larger metric, based on oil.
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IT IS a lesson of the past five years that benchmarks in unregulated markets can fall victim to the incentives they create. Subprime mortgages bundled into securities often won high scores from ratings agencies that stood to profit in a busy market. The London Interbank Offered Rate, LIBOR, was sometimes underestimated by banks which were cast in a healthier light by lower interest rates. Has something similar been going on in energy?
That is the su ion after a series of raids on May 14th by the European Commission’s compe ion authorities. The commission declared that it feared oil companies had “colluded” to distort benchmark prices for crude, oil products and biofuels. Royal Dutch S , BP, Norway’s Statoil and Italy’s ENI (which was not raided) all said that they were co-operating with the commission. The compe ion authorities also called on the London offices of Platts, a subsidiary of McGraw Hill, an American publisher and business-information firm, which sets reference prices for these commodities.
The volumes of oil and products linked to these benchmark prices are vast. Futures and derivatives markets are also built on the price of the underlying physical commodity. At least 200 billion barrels a year, worth in the order of $20 trillion, are priced off the Brent benchmark, the world’s biggest, according to Liz Bossley, chief executive of Consilience, an energy-markets consultancy. The commission has said that even small price distortions could have a “huge impact” on energy prices. Statoil has said that the commission’s interest goes all the way back to 2002. If it is right, then the sums involved could be huge, too.
The authorities are tight-lipped about their focus, but they seem to be examining the integrity of benchmark prices. Each day Platts’s reporters establish a reference price by following the value of public bids and offers during a half-hour “window” before a set time—4:30pm in London, for example. This “Market-on-Close” (MOC) method is based on the idea that using published, verifiable deals to set the price is more reliable than having reporters ring around their pals, who might be tempted to talk their own books.
Platts keenly defends the MOC method. It points out that it ignores bids, offers and deals that are anomalous or su ious. “We are not aware of any evidence that our price assessments are not reflective of market value,” it says, before declaring that it stands behind its method.
Money in movement
Yet such price-setting mechanisms have come in for criticism. The International Organisation of Securities Commissions (IOSCO), a grouping of financial regulators, said last year that the potential for false reporting “is not mere conjecture.” Total, a French oil giant that was not raided this week, told IOSCO that benchmark prices were out of line with the underlying market “several times a year”. In an investigation into trading by Gunvor, a Swiss-based firm, The Economist wrote last year that the benchmark for Urals oil has sometimes seemed vulnerable to distortion.
(read rest of article at the link)
It is a complicated picture and the EU’s compe ion authorities are likely to take months or years before deciding whether they suspect any oil companies of having committed a crime. Meanwhile, a reform of the oil markets is unlikely to come anytime soon. Despite IOSCO’s fears of price distortion, it backed away from recommending changes—after fierce lobbying from the industry.
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http://www.economist.com/news/financ...al-scale-libor
Pretty tough nut to crack. I'm not sure how the MOC method could be distorted to the point that prices are moved. I can understand the claim that Total makes...since pricing is the result of some speculative input...you'd expect it to pop out of synch on occasion, but to tie that to active manipulaton?
the traders, all commodities, are laughing their asses off as they continue to rig the market and pocket $100Bs.
If only we would all eschew that effete academic discussion and study. Then we could claim to know more than the EU Compe ion Authorities and just wrap this up with a talking point.
an oilco exec testified before Congress a couple years ago that he expected 30% of the price of oil was due to commodity traders, not supply/demand/etc.
Your naivete, simplicity are touchingly amusing
I've forgotten more about petroleum than you'll ever know. Your naivete is nauseating and not even slightly amusing.
Keep on with your no content talking points tho.
Hurry! Go find out what your no content, moonbat blogs tell you to think!
it's not about petroleum, it's about the commodities trading of the criminal, corrupt financial sector, world wide.I've forgotten more about petroleum than you'll ever know. Your naivete is nauseating and not even slightly amusing.
Keep on with your no content talking points tho.
More data, proof that the financial sector is ing us all over in the commodities market, oil, food, metals, etc.
What Goldman Sachs should admit: it drives up the cost of food
The irony, of course, is that while they're serving up a few meals, their core business is virtually starving people at the same time. In 2012, the US investment bank made an estimated $400m from speculating on food. The World Bank estimated in 2010 that 44 million people were pushed into poverty because of high food prices, and that speculation is one of the main causes.
Since Goldman led the drive to deregulate commodity markets in the 1990s (now why would Goldman Sucks do that?), after constraints were imposed following the 1930s Wall Street crash, they've been at the vanguard of creating and promoting complex commodity instruments, from which they've raked in huge profits. Wallace Turbeville, a former vice president and the inventor of commodity index funds, has been outing the company's methods. He says that in his time at Goldman, investment increased from $3bn in 2003 to $260bn in 2008, and commodity prices rose dramatically during the same period, increasing from 2006 to 2008 by an average of 71%.
In 1996, speculators held 12% of the positions on the Chicago wheat market, with most of the market being made up of the legitimate users of food – from farmers to producers. But the legitimate hedging element of commodity markets has virtually disappeared in the intervening years. By 2011, pure speculators made up a staggering 61% of the market. Of course, Goldman Sachs isn't the only player, but it is certainly the largest.
For several years, it was hotly debated whether speculation in food commodities drives up prices. But the evidence now firmly says it does, and that there's little correlation between rising prices and actual supply and demand. There are now well over 100 studies which agree (pdf), from sources as varied and valuable as Harvard University, the Food and Agricultural Organisation and the United Nations.
The knock-on effect of increased speculation has meant price es are now more and more common. In November 2012, the World Bank declared a new era of food price volatility.
While regulators play catch-up on both sides of the Atlantic, financial lobbyists are doing their utmost to block progress. The Dodd Frank Act, passed in 2010, imposed limits on speculation; but industry lobbyists are fighting at every pass.
http://www.guardian.co.uk/commentisf...food-prices-up
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