Friday, 01 August 2014  -  05 Shawwal 1435 H
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Are speculators behind oil price distortions?

ENERGY OUTLOOK


SYED RASHID HUSAIN

 


The “King of Oil” is dead!


Born Marcell David Reich in 1934, the billionaire Marc Rich, often credited of inventing the modern oil trading and pardoned by (former) President Bill Clinton over tax evasion on virtually the last day in his office, died last Wednesday in Switzerland aged 78. And as his colorful life came to an end, the role of money minting traders in the business of oil has been increasingly under microscope – in the EU as well as the United States.

Rich, the world’s most influential and indeed ‘controversial’ oil and commodities trader of his times, is accused by his critics of racketeering and busting sanctions against Iran in the 80s, with many terming him a white-collar criminal, a serial sanctions breaker, of building a fortune trading with revolutionary Iran post-1979, Muammar Gaddafi's Libya, apartheid-era South Africa, Nicolae Ceausescu's Romania, Fidel Castro's Cuba and Augusto Pinochet's Chile.

While Iran was holding US hostages in Tehran, Rich was able to bypass the US embargo on Tehran and sell Iranian oil to Israel, as Tel Aviv needed it – rather desperately.

 And perhaps for this reason, while Rich was under threat of a life sentence in a US jail on charges of sanction busting and tax evasion, Ehud Barak and Shimon Peres lobbied President Clinton on his behalf, leading to his pardon, in almost the last chaotic hours of his presidency. The presidential pardon now referred to as ‘pardongate’ provoked moral outrage and bewilderment in Washington – and elsewhere.

 Rudolph Giuliani, the famed New York mayor of the immediate aftermath of 911, was a prosecutor on the Rich case before becoming mayor. In a statement he said: "Mark Rich committed serious crimes against the United States and then fled the country when he was called to account for his conduct. He should never have been pardoned."

"The fact that Bill Clinton and Eric Holder engineered a pardon for him - without input from me, as the US Attorney who prosecuted him, or Janet Reno, as Attorney General, will forever be a blemish on our justice system," Giuliani said.

In interviews with journalist Daniel Ammann for his biography, "The King of Oil," the normally secretive Rich also admitted to bribing officials in countries such as Nigeria and assisting the Israeli intelligence agency, Mossad.

Stationed in Madrid in the late 1960s, Rich found ways to bypass the "Seven Sisters", the global oil majors that controlled world oil then, making his first impact on oil trading. Rich was one of the first to loosen their grip, becoming a middleman who bought cargoes of oil from one company to sell to another, on a short-term basis, helping give birth to the dynamic market of today. Interestingly, in the later years, Rich also invested with Bernard Madoff, the financier later convicted of operating a huge pyramid scheme.

 And although a sheer coincidence, yet interestingly enough, the death of this master craftsman of oil trading came as the US Federal Trade Commission opened a formal investigation into how prices of crude oil and petroleum-derived products are set and manipulated, mirroring a European Union inquiry, people familiar with the matter were quoted as saying. The investigation, now in a preliminary stage, will probably broaden into a multi-jurisdictional affair like the inquiry into manipulation of the London interbank offered rate, or Libor, people with knowledge of the ongoing investigation said.

 The opening of the oil-price investigation in the US is the latest in a growing number of simultaneous EU-US inquiries into areas including Libor, standard essential patents and Internet search manipulation, as well as merger reviews in the music and airline industries.

Under the probe the FTC is expected to scrutinize how price-reporting companies such as Platts, help determine market prices. Platts publishes the Dated Brent benchmark that contributes to setting the price of more than half the world’s oil.

 The ongoing EU oil probe, extending to undisclosed crude-derived products and biofuels, underscores how pricing in some energy markets lacks the transparency. Almunia, Europe’s top antitrust official, said May 28 if oil price manipulation did take place, it would have caused “huge” damage to consumers.

Platts’s Dated Brent crude assessment is based on information from traders through e-mails, phone calls, instant messages and Platts electronic system, called the eWindow. Platts, sets these oil price benchmarks through a voluntary window system. For a half hour daily, Platts polls people in the industry about bids, offers, and trades. The system relies on oil traders voluntarily and truthfully disclosing prices during this window.
 Then the company calculates the day’s price as of 4:30 p.m. London time. And this is then set as the benchmark price. And this benchmark price affects the value of over-the-counter oil derivatives, Brent futures traded on the ICE Futures Europe Exchange in London, and cargoes of crude from Canada to Australia.

According to oil trader, Halis Bektas, who talked to the WSJ, underlined the manipulation process as follows: One might be scheduled to buy perhaps 80,000 metric tons of fuel oil, its price pegged to the daily benchmark published by Platts. In the days before the purchase, one could offer to sell smaller quantities at discount prices – sometimes $3 to $5 a metric ton below market rate – and report those offer prices to Platts.

 The key factor that actually makes Bektas money is that oil traders are not required to report their purchases and sales of crude – the process is voluntary. Platts bases its benchmark price based on the information that traders voluntarily provide. So when a trader like Bektas reports a sale of the commodity below the current spot price, Platts takes this into account and lowers the spot price.This is legal, according to Bektas, because one is not colluding, lying, or faking the numbers (technically).

The US Commodity Futures Trading Commission is now also reviewing complaints of bogus bids and offers in the West Texas Intermediate crude-oil market, a practice known as “spoofing,” according to Bart Chilton, a commissioner. Spoofing, which is illegal, involves bids or offers that are entered with the intent of canceling them before the trade is carried out.

WTI, traded on CME Group Inc.’s New York Mercantile Exchange, is the world’s biggest energy-futures contract. Will FTC delve deep into this issue of price distortion, remains to be seen? The WTI today is hovering at around $95/barrel on NYMEX, while only a few years ago, during the early months of the Obama’s first term, it was in mid-30s. This all is baffling to analysts; especially when one considers that US inventories are near all time record highs, that American oil production is expanding dramatically, that American consumers are using significantly less gasoline/diesel than even a few years ago, and natural gas heating units are replacing oil heating units in homes all over America.

Oil producers have been blaming traders and speculators for contributing significantly to global oil market woes, for some time now. Conceding this as an issue, the world is slowly and gradually coming to grapple with it – one way or the other. A beginning seems to have finally been made.

Indeed oil markets are murky. Rich and the likes exploited it to the core. And this continues – even after his departure – one could say without any fear of denial.

 
   
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