The commodity world has been plagued by lawsuits and cries of foul play for what seems like decades now. For as long as there have been exchanges for physical commodities, there have been accusations of price manipulation along with some very compelling evidence. From the Hunt Brothers’ silver game to the recently accused Goldman Sachs, market manipulation for hard assets has been a continued theme [for more commodity news and analysis subscribe to our free newsletter].
Big Oil on the Chopping Block
This time around the accusations fall on the shoulders of three of the largest oil producers in the world: British Petroleum (BP), Royal Dutch Shell (RDS-A) and Statoil (STO). Specifically, the lawsuit concerns Brent crude, the global benchmark that is typically found in eastern nations. The three big oil firms got into some hot water with the oil extracted from the North Sea, as they are allegedly colluding to submit false information to Platts in order to manipulate prices. The lawsuit claims that these unethical practices have been ongoing for nearly 10 years.
This is not the first time we have seen such accusations come out and, in fact, it is not the first time it has involved Platts. To give you a brief overview, Platts generates quotes and prices on crude used by traders and institutions all around the world. The problem is that it bases its prices off of the deals made by traders and voluntarily submitted to the institution. That means that not everyone needs to record their deals with Platts. The manipulation often comes from firms falsely reporting a deal off of spot prices in order to move them one way or the other. You can read more about this practice here.
While it is rumored that this lawsuit contains “compelling evidence,” proving manipulation is extremely difficult in a legal sense. To be charged with manipulation, it must be proven that there was a clear intent to mislead markets in order to make a financial gain. Within the confines of trading, proving intent is often too difficult, allowing many would-be market manipulators off the hook.
Stopping the Problem
It is sad to say that we cannot trust large corporations or even individual traders to accurately report oil transactions at honest prices to Platts. The problem stems from a pricing system that is simply ineffective. Platts needs to undergo more regulation in order to fix the problem. A solution may not be clear at this point, but what is clear is the fact that the current method for pricing is not working and is leaving the door wide open for manipulation [see also Crude Oil Guide: Brent Vs. WTI, What’s The Difference?].
The current lawsuit will look hard into the actions of these three oil firms, but a bigger win would be an update to how Platts tracks and records its oil prices moving forward.
Disclosure: No positions at time of writing.