Dan Dicker, Oil & Energy Insider: This report is part of Oil & Energy Insider, the Oilprice.com premium publication. It gives subscribers an information advantage when investing, trading, or doing business in the energy sectors.
It’s been a busy year for the regulators and legal groups of major banks and hedge funds, as the recent fines of JP Morgan, Steve Cohen, and others have appeared with increasing frequency. The Feds might have been slow to anger, but are finally showing some teeth against manipulations and outright fraud in the capital markets after being virtually silent during and after the financial crisis of 2008.
That newfound regulatory zeal has come to the commodity markets too, with allegations of manipulations of Goldman Sachs into Aluminum and JP Morgan into Electricity markets.
That’s why the lawsuit from four traders from my old home at the New York Mercantile Exchange seems so well timed. In it, ex-NYMEX board member Kevin McDonnell and 3 other floor traders allege collusion of BP, Shell, Statoil and the private trading Vitol Group of manipulating physical Brent oil trades to fix reported prices from Platts – the industry’s recognized benchmarker of price.
Here’s the background you need to know to understand what’s going on here: First, recognize that Brent crude had taken over for West Texas Intermediate crude after the financial crisis for benchmarking the global prices that everyone outside of the US pays. But the daily production output from the North Sea is only between 1.2m and 1.4m barrels a day. That doesn’t seem like much to price the world’s supply, considering that it’s closer to 90m barrels a day, but that’s basically how the crazy financial pricing system has evolved. The issue is that only a handful of producers control what comes out of the North Sea, including the four defendants named in the lawsuit.
It’s not hard to imagine that when a small group of oil producers have huge levers into the pricing of world crude, that you’re going to get allegations of manipulations all the time, and the Brent market has been subject to those allegations since the 1980’s.
Is this case different? One thing that is clear is that the four traders in question were on the wrong side of trades in the Brent market during the last 3 years, most likely in the insane explosion of Brent crude prices compared to WTI – and they are looking to try and recoup the many millions of dollars they lost. Not one of these traders has motivations stemming from fixing whatever price fixing they imagine is happening – they just want their money back.
But on the other side is some compelling case evidence in the complaint from four lifetime crude traders who KNOW how the system works. When they lay out the physical trades that took place and the pricing that was translated through Platts, you get a picture that’s more than a little suspicious – if you’ve got the experience to understand the alleged manipulations, that is.
Imagine the temptation to withhold or misprice just a few cargoes, amounting to only several thousand barrels, which could move prices for several million barrels in your favor being held either financially or physically – to imagine it didn’t happen would be to expect a lot from these massive trading groups.
Proving it will be another matter, of course. But the outcome of the case isn’t the point. The point to me is again a clear example of how the commodity system, with physical control of commodity assets priced through financial vehicles like swaps and futures is a scourge that cannot assure anyone of legitimate prices.
And that doesn’t just include crude – it includes the price you pay for your gasoline at the pumps, your corn flakes and your aluminum coke can. I’ll be rooting for vindication of my old colleagues from the NYMEX. By Dan Dicker, of Oil & Energy Insider, a premium publication that gives subscribers an information advantage when investing, trading, or doing business in the energy sectors.