Concerns are growing about the reliability of oil prices, after a report for the G20 found the market is wide open to “manipulation or distortion”.
Traders from banks, oil companies or hedge funds have an “incentive” to distort the market and are likely to try to report false prices, it said.....
Petrol retailers use oil price “benchmarks” to decide how much to pay for future supplies.
The rate is calculated by data companies based on submissions from firms which trade oil on a daily basis – such as banks, hedge funds and energy companies.
However, like Libor – the interest rate measure that Barclays was earlier this month found to have rigged – the market is unregulated and relies on the honesty of the firms to submit accurate data about all their trades.Imagine that, an opaque pricing measure that relies on honesty of firms with a vested interest in acting as an oligopoly and manipulating the market.
This is another classic example of why benchmarks need to be based on actual trades.
This is one of the major concerns raised in the G20 report, published last month by the International Organisation of Securities Commissions (IOSCO).
In the study for global finance ministers, including George Osborne, the regulator warns that traders have opportunities to influence oil prices for their own profit.
It points out that the whole market is “voluntary”, meaning banks and energy companies can choose which trades to make public.
IOSCO says this “creates opportunity for a trader to submit a partial picture in order to influence the [price] to the trader’s advantage”....Is there a regulator who is responsible for this market?
The price reporting agencies, Platts and Argus, argue they employ journalists to weed out false data submitted by oil traders.
IOSCO says reporters are “well-aware that traders have an incentive to push the market one way or another and do not generally believe everything they are told”.
However it points out this system is heavily reliant on the “experience and training” of journalists to make a judgement about what the oil price should be....Why rely on judgement when historical facts could be used instead?
Lord Oakeshott, the former Liberal Democrat Treasury spokesman, said the oil price system ought to be examined in the wake of the Libor scandal.
“Clearly it’s right we must shine a light on how other crucial benchmark prices are reported, especially when they affect the cost of living for millions of motorists,” he said....Shining the bright light of transparency into the opaque corners of the financial system.
Simon Lewis, chief executive of the Global Financial Markets Association, has raised concerns about the “opaque” way the oil price is worked out.
In a letter to IOSCO, he said price reporting agencies may not be as impartial as they claim, because they take fees from banks and oil companies to provide information....
Platts added that there are four main differences between oil prices and Libor – the quality of its data, its independence, competition between reporting agencies and the transparency of its methodology.And one similarity, neither oil prices or Libor is based off of actual trade data that is made readily available to all market participants.