the dwindling of Brent crude output is raising fears of manipulation


AS THE last drops of oil are extracted from fields in the North Sea and Texas, allegations of price squeezing and manipulation are rampant.


The flow of Brent and West Texas Intermediate (WTI), the crude oil blends that set the world price of oil, has dwindled to a trickle. Oil companies know that something must be done, but Nymex and the International Petroleum Exchange (IPE), the billion-dollar futures markets built on the trade in Brent and WTI cargoes, are maintaining an embarrassed silence. While oil traders argue over what ought to replace the Brent and WTI benchmarks, a private publishing company, Platts, is making decisions that will affect the worldwide trade in crude oil.




Is this the way to run the world’s most important commodity market? Who controls the oil price? At the beginning of the last century, the answer was easy: John D. Rockefeller and Standard Oil. The Standard was smashed to bits by the US courts in 1911 in a celebrated antitrust case and during the 1930s, the Texas Railroad Commission took over, boosting a moribund oil price by issuing quotas for Texas and Oklahoma oil producers.




In the 1950s, the Seven Sisters (Esso, Mobil, Chevron, Texaco, Gulf, BP and Shell) dominated the market. They lost their crowns through war and nationalisation to state oil companies: Saudi Aramco, National Iranian Oil Company and Petroleos de Venezuela. Pillars of the Opec cartel, they would love to take over Rockefeller’s role. But Opec’s only tool is to withhold production and it has been cutting output as non-Opec nations, such as Russia and Norway, add to a growing pool of crude.




To add to the confusion, there is not one oil price. There are hundreds of prices. Crude oil is not uniform in quality. Refiners pay higher or lower prices for oil depending on its origin. Typically, North Sea oil fetches more than Arabian crude. US crudes command even higher prices.




Such a large market — the world burns 70 million barrels a day — needs a focus, a price point to which a refiner, a power company or even an airline may look for a guide to the cost of fuel. In 1983 Nymex, a commodities trading floor in New York, launched crude oil futures. Nymex’s main business had, until then, been trading the Maine potato crop. Today, it is the world’s largest oil futures market, trading WTI, a contract based on a blend of crude delivered at Cushing, Oklahoma.




Two other crudes act as benchmarks –– Dubai, which sets the trend for crude destined for Asian markets, and Brent, the largest price-setter in the world energy market. Every barrel from the North Sea, North Africa and West Africa and all Middle Eastern oil destined for refineries in the Atlantic Basin is priced above or below the value of a barrel of Brent loaded at Sullom Voe in the Shetland Islands.




In 1988 the IPE, based in London, began a paper futures market in Brent, giving refiners a way to hedge exposure to physical oil prices, and speculators a way to bet on the outcome of the next Opec meeting. It sounds sophisticated.




Unfortunately, crude is a more apt description of the oil market. Since the first cargoes were lifted in the 1980s, trade in Brent has been subject to accusations of manipulation, squeeze and hanky-panky. In 1988, a secretive Dutch oil trader, John Deuss, sought to “corner” the market. Using forward contracts, his company, Transworld, bought all but one of the 42 Brent cargoes to be loaded in January. His bet, worth $425 million, assumed that the shortage would create a panic as refiners scrambled for stocks and that the price would soar. Unfortunately for Deuss, 1988 proved to be a mild winter, demand was slack and the major oil companies spotted his ploy. Fearing a government inquiry, Shell, BP and Exxon dumped oil on the market to stabilise the price. Transworld was said to have lost $200 million on the gamble.




That has not stopped speculators from trying to squeeze the Brent forward market, known as 15-day Brent. Another trader, Transnor settled a dispute with BP, Shell, Exxon and Conoco over a technique known as “spinning”. Two years ago, Tosco, a US refiner, sued Arcadia, an oil trader, in New York, accusing it of illegal monopolisation of Brent. The case was settled, allegedly with a payment of $10 million.




Since then, the problem has worsened as Brent reservoirs are depleted. Platts, the organisation publishing “official” Brent prices has decided to act. Jorge Montepeque, director of markets for Platts, says that there have been frequent signs of squeezing. “The current complaint is that Brent has become uncompetitive,” he said. “The number of Brent cargoes to be loaded in July is only 18. When a programme has so few cargoes, it is easy for one person to buy them up.”




Platts this week decided to include Forties, a BP crude, and Oseberg, a Norwegian crude, in its definition of Brent, so increasing potential cargoes to almost 100. It is no surprise that the idea is welcomed by BP, which proposes to replace the standard 15-day Brent contract with its own Brent Forties Oseberg (BFO). Shell is in a huff, complaining that Forties is different and trades at different prices.




And now we have allegations of price squeezing in the WTI market. It is no academic argument. Pressure points, bottlenecks and squeezes in the forward market for cargoes of oil can have knock-on effects, says Damian Kennaby, of Cambridge Energy Research, the consultancy. “The crude markets are very highly geared,’’ he says. “Very small changes in physical shipments can change the Brent price.”




According to Kennaby, the manipulation of Brent has played havoc with refining margins. Refiners plan their business and sell petrol on the basis of an expected Brent price. “If the Brent price is squeezed up a dollar, they can lose their entire profit,” he says.




Platts says that it has made its decision and that it is up to the market whether it uses the new Brent price. Whatever the views, traders are likely to follow. One oil company executive said: “Platts is in a powerful position. Over 95 per cent of trade in Europe is based on Platts pricing. If a trader does not like their assessment, he could become very isolated.”




The next target for Platts is the WTI market, and the quarrelsome oil companies will probably agree for fear of arousing the interest of government. In the late 1980s, a US judge ruled that Brent was a futures market subject to US securities regulation. Aroused from its slumbers, Britain protested and the US regulator, the CFTC, overruled the court decision. Trading in Brent is still self-regulated, governed by a code of conduct ultimately supervised by the FSA. But if the oil industry wants to keep regulators at bay, it needs to sharpen up its behaviour.










By Carl Mortished


The dwindling of Brent crude output is raising fears of manipulation











AS THE last drops of oil are extracted from fields in the North Sea and Texas, allegations of price squeezing and manipulation are rampant.


The flow of Brent and West Texas Intermediate (WTI), the crude oil blends that set the world price of oil, has dwindled to a trickle. Oil companies know that something must be done, but Nymex and the International Petroleum Exchange (IPE), the billion-dollar futures markets built on the trade in Brent and WTI cargoes, are maintaining an embarrassed silence. While oil traders argue over what ought to replace the Brent and WTI benchmarks, a private publishing company, Platts, is making decisions that will affect the worldwide trade in crude oil.




Is this the way to run the world’s most important commodity market? Who controls the oil price? At the beginning of the last century, the answer was easy: John D. Rockefeller and Standard Oil. The Standard was smashed to bits by the US courts in 1911 in a celebrated antitrust case and during the 1930s, the Texas Railroad Commission took over, boosting a moribund oil price by issuing quotas for Texas and Oklahoma oil producers.




In the 1950s, the Seven Sisters (Esso, Mobil, Chevron, Texaco, Gulf, BP and Shell) dominated the market. They lost their crowns through war and nationalisation to state oil companies: Saudi Aramco, National Iranian Oil Company and Petroleos de Venezuela. Pillars of the Opec cartel, they would love to take over Rockefeller’s role. But Opec’s only tool is to withhold production and it has been cutting output as non-Opec nations, such as Russia and Norway, add to a growing pool of crude.




To add to the confusion, there is not one oil price. There are hundreds of prices. Crude oil is not uniform in quality. Refiners pay higher or lower prices for oil depending on its origin. Typically, North Sea oil fetches more than Arabian crude. US crudes command even higher prices.




Such a large market — the world burns 70 million barrels a day — needs a focus, a price point to which a refiner, a power company or even an airline may look for a guide to the cost of fuel. In 1983 Nymex, a commodities trading floor in New York, launched crude oil futures. Nymex’s main business had, until then, been trading the Maine potato crop. Today, it is the world’s largest oil futures market, trading WTI, a contract based on a blend of crude delivered at Cushing, Oklahoma.




Two other crudes act as benchmarks –– Dubai, which sets the trend for crude destined for Asian markets, and Brent, the largest price-setter in the world energy market. Every barrel from the North Sea, North Africa and West Africa and all Middle Eastern oil destined for refineries in the Atlantic Basin is priced above or below the value of a barrel of Brent loaded at Sullom Voe in the Shetland Islands.




In 1988 the IPE, based in London, began a paper futures market in Brent, giving refiners a way to hedge exposure to physical oil prices, and speculators a way to bet on the outcome of the next Opec meeting. It sounds sophisticated.




Unfortunately, crude is a more apt description of the oil market. Since the first cargoes were lifted in the 1980s, trade in Brent has been subject to accusations of manipulation, squeeze and hanky-panky. In 1988, a secretive Dutch oil trader, John Deuss, sought to “corner” the market. Using forward contracts, his company, Transworld, bought all but one of the 42 Brent cargoes to be loaded in January. His bet, worth $425 million, assumed that the shortage would create a panic as refiners scrambled for stocks and that the price would soar. Unfortunately for Deuss, 1988 proved to be a mild winter, demand was slack and the major oil companies spotted his ploy. Fearing a government inquiry, Shell, BP and Exxon dumped oil on the market to stabilise the price. Transworld was said to have lost $200 million on the gamble.




That has not stopped speculators from trying to squeeze the Brent forward market, known as 15-day Brent. Another trader, Transnor settled a dispute with BP, Shell, Exxon and Conoco over a technique known as “spinning”. Two years ago, Tosco, a US refiner, sued Arcadia, an oil trader, in New York, accusing it of illegal monopolisation of Brent. The case was settled, allegedly with a payment of $10 million.




Since then, the problem has worsened as Brent reservoirs are depleted. Platts, the organisation publishing “official” Brent prices has decided to act. Jorge Montepeque, director of markets for Platts, says that there have been frequent signs of squeezing. “The current complaint is that Brent has become uncompetitive,” he said. “The number of Brent cargoes to be loaded in July is only 18. When a programme has so few cargoes, it is easy for one person to buy them up.”




Platts this week decided to include Forties, a BP crude, and Oseberg, a Norwegian crude, in its definition of Brent, so increasing potential cargoes to almost 100. It is no surprise that the idea is welcomed by BP, which proposes to replace the standard 15-day Brent contract with its own Brent Forties Oseberg (BFO). Shell is in a huff, complaining that Forties is different and trades at different prices.




And now we have allegations of price squeezing in the WTI market. It is no academic argument. Pressure points, bottlenecks and squeezes in the forward market for cargoes of oil can have knock-on effects, says Damian Kennaby, of Cambridge Energy Research, the consultancy. “The crude markets are very highly geared,’’ he says. “Very small changes in physical shipments can change the Brent price.”




According to Kennaby, the manipulation of Brent has played havoc with refining margins. Refiners plan their business and sell petrol on the basis of an expected Brent price. “If the Brent price is squeezed up a dollar, they can lose their entire profit,” he says.




Platts says that it has made its decision and that it is up to the market whether it uses the new Brent price. Whatever the views, traders are likely to follow. One oil company executive said: “Platts is in a powerful position. Over 95 per cent of trade in Europe is based on Platts pricing. If a trader does not like their assessment, he could become very isolated.”




The next target for Platts is the WTI market, and the quarrelsome oil companies will probably agree for fear of arousing the interest of government. In the late 1980s, a US judge ruled that Brent was a futures market subject to US securities regulation. Aroused from its slumbers, Britain protested and the US regulator, the CFTC, overruled the court decision. Trading in Brent is still self-regulated, governed by a code of conduct ultimately supervised by the FSA. But if the oil industry wants to keep regulators at bay, it needs to sharpen up its behaviour.