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Oil Regulators Wimp Out on Requiring More Transparency

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A Wall Street Journal article tonight (hat tip Joe Costello) has the whiff of disinformation about it. It dutifully reports that oil regulators have retreated in a serious way from requiring more disclosure of oil market transaction. The article never offers an explanation for the change in stance and focuses attention on actors who are highly unlikely to be the moving force.

First, on the regulatory retreat:

In an interim report to the G-20, ahead of final recommendations later this year, the International Organization of Securities Commissions, an association of global financial-markets regulators such as the Securities and Exchange Commission, retreated from an earlier proposal to set up a regulatory body to oversee the so-called physical oil market—where oil on tankers and in pipelines is traded between major oil producers and refiners such as Exxon Mobil Corp and Royal Dutch Shell PLC…

Trading in physical oil has been of particular concern to regulators, who worry that it has caused volatility and pushed up oil prices globally. Physical oil prices often act as a benchmark for the larger and more actively traded commodities-futures market, including more than 800 exchange-traded energy contracts in the U.S. alone…

“Even if this situation is not currently being abused, the potential for abuse is obvious,” said Liz Bossley, chief executive of Consilience Energy Advisory Group Ltd., a London-based consultancy.

Keep in mind that manipulation and lack of decent information have long plagued the oil market. OPEC (yes, the powerful OPEC) no longer uses the spot market as the basis for its oil pricing because it was too easily manipulated. Oil supply and demand data are dreadful. Inventory information isn’t as germane as it is in other markets because some critical inventories, like the Strategic Petroleum Reserve, aren’t included, plus (and most important) oil can be inventoried in the ground, by cutting production schedules. So more information in this murky arena would seem to be enormously valuable to policymakers and the public.

But the Wall Street Journal sidesteps the issue of who was really behind this climbdown, and instead focuses on some pretty minor beneficiaries: the information services Platts and Argus. The article brings them up early on, in the third paragraph:

This week’s report was seen as a reprieve for a group of pricing services such as Platts, a unit of McGraw-Hill Cos., MHP -0.32% and Argus Media Inc., which collect and publish prices used by the world’s oil traders. It also demonstrates the difficulty financial regulators have found coming up with ways to extend their reach throughout the murky world of commodities trading.

It isn’t until paragraph 14, when cursory readers have already checked out, that we get a mention of who really wins from the continued lack of transparency:

In an initial report in March, the organization said it was concerned prices could be manipulated if traders submit false prices or volumes. Among a list of proposals, the organization said it was considering establishing an industry regulator as well as requiring mandatory reporting of trades….

Some traders have been accused in the past of abusing the pricing system, but the number of cases has dropped significantly in recent years. In 2000, U.S. refiner Tosco Corp. sued Arcadia Petroleum, a London-based oil-trading firm, accusing it of manipulating oil prices. Arcadia later settled the suit for an undisclosed sum.

In 2007, Marathon Oil Corp. agreed to pay $1 million to settle oil-manipulation charges by the Commodity Futures Trading Commission.

Arcadia and Marathon neither admitted nor denied wrongdoing.

Now these four paragraphs are the sum total of the mentions of possible and actual abuses by traders. By contrast, the information vendors are the focus of a full eleven paragraphs of the article. The mention of fewer cases of pricing abuses being filed might be taken to mean there is less bad behavior, when it might also be a function of weaker oversight.

Readers might think I am making overmuch of this story, but it is precisely this sort of objective-sounding but substantively misleading reporting that lulls the public to sleep on important issues. A more vigilant public is less likely to be conned.

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27 comments

  1. The man

    Go back to sleep everyone…Oil prices are coming down just in time for the election…again….

  2. Expat

    The question being asked was whether or not the pricing services were being manipulated. I.E. Were prices published in Platts non-representative and manipulated? Consequently, regulators were considering means to control prices by regulating the price reporters, not the market participants.

    In reality, Platts prices are not manipulated (in the sense that they might not represent the market). The system works fairly well. The question that remains is whether or not the market Platts reports (the prices they publish) are manipulated.

    The answer is that they are, but in a quasi-legal way. If someone wants higher prices printed in Platts, he must buy on the market and drive prices up. This buying must conform to the methodology used by Platts to assess the market. If it does, Platts will publish higher prices.

    This is the bread and butter of physical oil traders. Every day, in every market, someone with an agenda is buying or selling in order to push prices up or down. But the fault is not with Platts or Argus.

    If Citi shares suddenly surge by 200% because someone decided to buy lots and lots in perfectly legal trading, would we hold the NYSE responsible? Or would we even bother prosecuting the buyer? Oil trading is the same; yes, it’s “manipulation” but it’s perfectly legal.

    1. Hugh

      It’s legal in the sense that the crooks wrote the laws and rules to make their looting “legal”. Such abuses are unreformable–in that those who had the power to twist the law have the power to keep it twisted–and are the stuff from which revolutions are made.

      When the rule of law is debased, legality is no longer a defense.

      1. enouf

        yep .. that’s about it right there, yep

        (i’d alter ‘wrote the laws’ to-> ‘wrote the Acts/Statutes/Regs/Codes, etc’ or, just even ‘legislation’ rather than use the word “law” there), but that’s just me being pedantic ;-) (but for good reason)

        Love

    2. F. Beard

      Oil trading is the same; yes, it’s “manipulation” but it’s perfectly legal. Expat

      The law should be changed to ban credit creation or at least ALL government subsidy of it. Since credit creation is essentially a form of counterfeiting then NO ONE is “credit-worthy.”

  3. overpopover

    This article is nothing more than typical lefty anti-americanism. Here’s the key

    “information isn’t as germane as it is in other markets because some critical inventories, like the Strategic Petroleum Reserve, aren’t included”

    This makes it seem that American corporations and our government are the key players in keeping the markets uninformed. But go to “the Oil Drum” or read any decent book on oil and you’ll find that the major producers, particularly Saudi Arabia (the Russians are no better), have no interest whatsoever in transparancy…and that these players dwarf the Strategic oil reserve in importance.

    1. Yves Smith Post author

      You are reading something into this that reflects YOUR bias as well as ignorance.

      First, tell me how mentioning the Strategic Petroleum Reserve is “leftie bias”.

      Second, the reason I mention it is this blog had a huge row on this topic in 2008 with Paul Krugman, who insisted the oil price runup was due to fundamental factors. We argued that the spike was too dramatic, that too many commodities were moving in lockstep, that given the ability to store oil in the ground, oil inventories were not a great guide in isolation, there were hoarders (such as the SPR, which WAS buying at the time, plus even more importantly, China, which was hoarding finished product, as in diesel, for the Olympics [you could see this also reflected in crack spreads]. I didn’t want to go into that in detail because 1. it looks self congratulatory and is not relevant to the current discussion and 2. it would look like gratuitous Krugman bashing.

      Better trolls, please.

      1. charles sereno

        “Better trolls, please,” said Yves, fending off an infantryman, while all alert for a cavalry charge. In a very few weeks or even months, I look forward to an analysis on this site by Chris Cook.

        1. Chris Cook

          Did I hear my name mentioned?

          Well, I misjudged how long the refiners and sovereigns like China would keep overpaying the Iran ‘risk premium’, but the market is now in a managed decline (managed by J P Morgan Chase, Goldman Sachs and probably BP) which is showing all the signs of turning into a rout.

          Possibly Moody’s downgrades of many banks today – particularly Morgan Stanley – will see them pulling back their swap dealing positions which could be interesting tomorrow.

          Marshall Auerback pointed out today the crucial role of Chinese reserve building in supporting prices, but I think even they might by now be thinking of a bit of ‘wait and see’ at the minute.

          If you couple that with traders and speculators summoning up the courage to go short……then you’d better watch out.

          Auerback also pointed out the fact that oil has now definitively parted company from its previous correlation with equities. That is another indicator that the de-financialisation of the oil market is probably well advanced.

          The bottom line is that the greatest market manipulation in commodity trading history is moving into its final phase, and we are getting all sorts of smoke and mirrors disinformation from the usual suspects to cloud this reality.

    2. enouf

      whilst i might concur with your overall comment that the SPRs are dwarfed once you factor in others you mentioned, i’d like to know;

      a) what is ‘lefty anti-americanis[t]m’ about the Rule of Law?
      b) which ‘American Corporations’?

      as to (b) — There are no “American” mega-cartels, they are all Global NWO-ists, they owe no Allegiance nor Loyalty to any Nation/State.

      Love

  4. Warren Celli

    Pay attention, this is very important…

    The difference in the physical markets and the commodities-futures markets in oil —and the role they each play in price manipulation — are not limited to oil.

    Nay, nay, we see the same manipulation in gold, baloney, and the private sector and the government sector in language.

    In gold, the physical vs paper price manipulation has screwed countless millions of people as it has caused them to frustratingly jump in and out of the market.

    So too do we have the same problem in the baloney market, further exacerbated by cross commodities trading where the end market is not always clear. Is the commodity going into baloney, or will it be a sausage, or a wiener schnitzel, or, will it remain on the hoof as represented by paper? Paper that could be physical, or might even be in the far more easily manipulated electronic form. Further exacerbating the problem is the question of who will get the physical or potential paper or electronic baloney”? People in the government sector — you know those dumb asses who eat a lot of baloney — or people in the private sector — the folks who sell a lot of baloney to the government sector. And exacerbating that question of course is the fact that just a very few in the private sector, the Xtrevilists, own and control the government sector.

    There is one sure fact in all of this, regardless of the commodity or issue that is being discussed, and that fact is, that as baloney goes up, trust in the ‘rule of law’ and morality go down. That is the truth revealed in the inviolable universal baloney curve;

    http://www.fountainofbaloney.com/fb2images/ubalcurve-2.png

    Deception is the strongest political force on the planet.

    1. Up the Ante

      “.. the fact that just a very few in the private sector, the Xtrevilists, own and control the government sector. ”

      They even appear to own deli proprietors [governors].

      “Once the story of the state’s supposed plan was in play, the governor went out of his way to neither confirm nor deny it was correct, yet he couldn’t stop talking around it while never really saying anything. At least not believable. What came out was vintage Cuomo’s Deli, where you can get any cold cut you want as long as it’s baloney, sliced anyway you want to hear it.

      http://www.timesunion.com/local/article/Cuomo-s-fracking-baloney-3639457.php

      lol

      1. enouf

        a remarkably comical connection – and truly witty on your part for posting it, thanks for that chuckle ;-)

        ..but I’d like also thank you for just keeping the attention focused on the extreme seriousness of the friggin Fracking issue … which haunts us already, ..and relentlessly keeps creeping closer into a nightmare-of-no-return.

        Love

  5. Richard

    Thanks for the reminder of how important it is that there is transparency and what a terrible job the regulators are doing insuring that there is transparency.

  6. Susan the other

    Since there is a deadly and determined war going on over oil, this piece of information is a lot more interesting than one on the price of cantaloupes. And not surprising since truth is always the first casualty. What’s most curious about the oil market is the strange and tight collusion (it seems to me) between Russia and the US. Nobody writes about it. You can’t even read it between the lines. But something is going on which is important enough to maintain a protracted war in the middle east for decades. Why would transparency in the markets be sacrificed? We can speculate. What if there were actually a huge over-abundance of oil? Then somebody has to move in and control it with an iron fist in order to maintain prices and maybe protect the environment. Oil is a filthy business.

    1. Up the Ante

      “What if there were actually a huge over-abundance of oil [wealth]? ”

      fixed it for ya’

  7. jsmith

    And yet another expose on how completely and incorrigibly corrupt our current system is.

    Yes, the commodities markets are “murky” and seemingly difficult to understand if one’s not a “member” – snicker – of the cult, so what is one to do?

    How about advocate for the nationalization of the entire energy sector and the complete end to any sort of resource speculation?

    Don’t want to hear any more about price discovery, market efficiency and all that horsehit.

    Don’t want sociopathic d-bags to continue to destroy our species chances of survival so they can make yet more billions.

    No more conversations, debates and analyses.

    The human race is well past the point of needing to end the age of fossil-fuels yet here we are allowing discussions of the “market” to blind us to what needs to happen to save ourselves and the planet as we know it.

    Every rationale we hear defending the current system is an argument AGAINST the continued existence of humanity.

    Is is that simple?

    Yes, it is.

    1. Walter Wit Man

      We should nationalize critical natural resources like oil.

      Instead of protecting BP like Obama did after they were responsible for the biggest oil spill in history, the U.S. should have hit them with all the damages they could get. They could have wiped out the company if they would have pursued full compensation. And if the damage claims didn’t wipe out BP the U.S. should seize by eminent domain whatever is leftover.

    2. Warren Celli

      Good comments both, let’s first nationalize the electoral process through boycotts and direct democracy so that we can then nationalize the rest.

      Fairism — one for all all for one!

      Deception is the strongest political force on the planet.

  8. Heretic

    Thank you for critiquing this article. Reading your blog always provides me lessons on having sharp eyes and critical thinking, as well as exposing the various ways in which our elites beguile and deceive us.

  9. Mcmike

    Kinda o/t but… Does anyone else remember the story about Goldman being sued over using due dilligence info they obtained as broker to crater an oil player? Kinda came and went out of the news.

    I remember at the time Goldman owned a refiner. Seems like a clear conflict to me, they are in literally every angle of the deals. Prop gambling, ipo underwriting, business sale broker, debt vetting, loan making, trade clearing, market making… And owning an actual physical refinery (or somesuch).

    Struck me as odd no one seemed to make a big deal of this.

  10. dfmills

    There was some coverage a while back on the influence of deliveries into the Brent / BFOE physical complex / tanker market by Hetco and their possible “influence” on pricing for contract and derivatives settlements. Worth a look into. Hetco is a JV company in which Amerada Hess is involved. That is old school oil trading. Good Luck.

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