When you determine the price of most of the world’s oil, you need to keep up with the times.
That’s why Platts, which publishes benchmarks for crude from Colombia to Norway to Australia, is changing how it sets one key marker.
After an unprecedented buying spree by a Chinese trader rattled the market for Middle East crude in August, the information provider will use more oil grades when deciding how much the region’s shipments cost.
That’ll raise the volumes underpinning the company’s system and ensure that prices reflect supply and demand, according to consultants KBC Process Technology Ltd. and IHS Inc.
“It’s a good decision, the market was very worried,” Ehsan Ul-Haq, a senior analyst at KBC, said by phone from London. “The problem was that nobody knew exactly how many cargoes were left for delivery, whether there would be enough for other players.”
As regulators worldwide scrutinize the way financial markers are set, influencing everything from currencies to borrowing rates, Platts is trying to reinforce a process that’s obscure to most outside the world of physical oil trading.
Its system relies on crude traders reporting transactions voluntarily during a half-hour period, known as the window, in contrast to price-setting for other assets such as equities where each move in an individual stock price is recorded on a public exchange.
In Platts’s market-on-close process, bids, offers and deals are reported by traders in a fixed period each day through a technology platform set up by the company. They also can report via e-mail, instant message and phone.
These numbers are then used to create end-of-day price assessments for various commodities and form benchmarks for transactions globally.
The European Commission said this month it dropped an investigation into the potential manipulation of oil price benchmarks, after authorities in 2013 raided the offices of Royal Dutch Shell Plc, BP Plc and others including Platts.
That’s a relief to crude traders who feared crackdowns similar to the penalties on banks accused of rigging other markers including the London Interbank Offered Rate or Libor.
Platts, a unit of McGraw Hill Financial Inc., has confidence in its system. Its market-on-close price assessment process “has been very, very credible,” said Dave Ernsberger, the London-based global director of oil at the company.
“If it wasn’t for the MOC process, the market will not have the same level of information at its hands to have a coherent discussion of pricing of crude oil in the Middle East.”
Bloomberg LP, the parent of Bloomberg News, competes with Platts and other companies in providing energy-market news and information.
The changes in Platts’s assessment of Dubai crude are aimed at “ensuring that our benchmarks are really strong now and going forward into the future,” according to Ernsberger.
To determine the Middle East oil benchmark, used as a marker for about 20 million barrels a day of the region’s crude sold to Asia, Platts runs its process from 4 p.m. to 4:30 p.m. in Singapore each business day. Platts currently uses Dubai, Oman and Abu Dhabi’s Upper Zakum grades to calculate the reference price.
“For Dubai, the rules are set by price reporting agencies, so the onus is on those agencies to ensure the playing field is fair and level for all participants,” Shell said in an e-mail, citing Mike Muller, vice president at Shell International Trading and Supply Crude.
“There need to be safeguards to prevent the risk of distortion and to ensure the Dubai benchmark price mirrors true market supply and demand fundamentals.”
From Jan. 4, Qatar’s Al-Shaheen and Abu Dhabi’s Murban will be added to the process. The new grades will take the volumes underpinning the Dubai benchmark up by more than 50 percent to about 2.4 million barrels a day, which is about the same as South Korea’s consumption.
“Adding more grades is one way to boost liquidity and make a crude benchmark more robust and representative of market forces,” Victor Shum, a vice president at Englewood, Colorado- based consultant IHS, said by phone from Singapore. “The idea is to make the Dubai benchmark more reflective of the market.”
State-run China National United Oil Corp., a unit of the country’s biggest energy company, bought an unprecedented 72 cargoes, or 36 million barrels, of Middle East crude as part of the pricing process in August.
The purchase was so substantial that it prompted concern among traders that the amount of crude available for delivery as part of the Platts process would be exhausted and lead to a “price squeeze,” according to KBC’s Ul-Haq.
“The amount of trading activity that we reported in August this year demonstrated for sure there was the potential for trading activity to cover pretty much all of the available cargoes that were open in the marketplace,” Platts’s Ernsberger said.
“That was the event that demonstrated that it was important to take that conversation up a gear or two and move towards implementation.”
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