Brent Price Investigation Focuses on Benchmarks and Major Oil Companies

European Commission investigators raided the trading offices of three major oil companies and a price reporting agency recently amid complaints about price-fixing and collusion in the global crude oil, refined products and biofuels markets. At issue is the means of settling the markets on a daily basis and how these companies participate in the process.

While it is very early in the investigative process, Jeffrey C. Kerr, Managing Analyst covering Downstream Oil and Gas, suggests that the EC may be looking into the influence of a subset of trade players in setting the value of the Platts Brent-Forties-Oseberg-Ekofisk (BFOE) crude oil price assessment, which is used as a major pricing benchmark for more than half of the world’s term crude oil purchases, akin to the investigation earlier in the year into the London Interbank Overnight Rate (LIBOR) scandal, which rocked the banking world and resulted in large fines and sanctions among some of the market’s bigger participants. The EC might also be examining if Platts has too much power in assessing market prices, which would have its competitors Argus Media, ICIS, Thomson Reuters and Bloomberg licking their chops at potentially seizing some marketshare.

Kerr states: “Oil companies are relatively used to being investigated about price fixing and collusion, as governments regularly start investigations into how prices are set under the guise of potential damages to consumers. Collusive behavior is rarely found, and companies are commonly cleared of any wrongdoing. This time may be different, however, as French major Total, which is not under investigation, appears to be the party that alerted the European Commission to improprieties in the Brent market settlement process. Total has reportedly provided materials and examples of collusive practices that led to this week’s raids.”

Statoil, Royal Dutch Shell, and BP are under investigation for activities surrounding the price-settling process used by Platts to settle the daily market for Brent, with all parties promising cooperation with the authorities in this investigation. Other oil companies such as Italy’s Eni are also cooperating, despite not currently being probed themselves. Other fuel price assessments, like gasoline, diesel and ethanol are also under investigation by the EC. Major trading houses Glencore, Gunvor, Mercuria, Vitol and Trafigura are not part of the investigation.

Platts is also used to this kind of business scrutiny, since its prices have been used as industry benchmarks for over a century. In 1992, Platts introduced its Mean-of-Close (MOC) pricing window in the Asia-Pacific crude oil market, settling the day’s prices on a benchmark by opening a market window at a designated period each day for half an hour, collecting prices, volumes and counterparties, and then determining a daily price range base based on a weighted average of that half-hour’s worth of trade on the benchmark. Over the next two decades, Platts has refined the process and spread it to all of the markets it covers. Platts, a unit of publisher McGraw-Hill Financial, sees any attempt by regulators to step in and regulate its business under the guise of an investigation or sanction as unacceptable.

The investigation will be watched very closely by the oil markets, since it will likely have a major impact upon the way trades are reported, prices are discovered, and futures, swaps and options are settled in the oil markets in the coming years, no matter how the investigation ends.