New Allegations Claim Oil Giants Played God With Crude Market
Now, the aftereffects of the 2010, 4.2-million barrel Gulf of Mexico oil spill are not the only litigation nightmare to worry BP (NYSE:BP) investors. Four energy traders have filed a class action accusing some of the world’s biggest oil companies — including BP, Statoil (NYSE:STO), and Royal Dutch Shell (NYSE:RDSA)(NYSE:RDSB) — of conspiring with Morgan Stanley (NYSE:MS) and energy traders like Vitol Group to manipulate the spot prices for Brent crude oil for more than ten years.
Documents filed in a New York district court claim that those companies “monopolized the Brent Crude Oil market and entered into an unlawful combination, agreement, and conspiracy to fix and restrain trade in, and intentionally manipulate Brent Crude Oil prices and the prices of Brent Crude oil futures contracts.”
In particular, the claim alleges they achieved those results by “deliberately reporting inaccurate, misleading, and false information regarding Brent Crude Oil prices and transactions to Platts,” a leading price-reporting agencies whose quotes are used by traders worldwide, according to the proposed class action.
The complaint, which was filed on October 4, is not the first look at price rigging. In May, the European Commission launched an investigation of its own and at least six other lawsuits have been filed in the United States. But this case provides a much more detailed picture of the strategies used and the alleged manipulations, which will help the regulators investigating the accusations.
Stocks and futures transactions are conducted on regulated exchanges with visible pricing, but by comparison, the $5.7 trillion-a-year market for physical commodities is much less transparent and spot trading is largely private. “It’s a very obscure market,” David Kovel, a lawyer for the traders, told Bloomberg regarding oil traded outside of commodity exchanges. “To outsiders, it can seem impenetrable. Specialists and specialty traders in the market can take advantage of this obscurity.”
In the course of 85 pages, the four traders — one of whom was the former director of CME Group’s (NASDAQ:CME) New York Mercantile Exchange, one of the markets where contracts for future Brent deliveries are traded — outline in clear terms the defendants’ methods. According to their claims, the market showed how the spot price of Dated Brent, a term used to describe physical cargoes of crude oil in the North Sea that have been assigned specific delivery dates, was artificially pushed up or down by the companies involved, depending how the movement would benefit their Brent Crude derivative positions.
According to the complaint, the system by which Platts prices commodities can be “easily gamed.” The methodology — known as “Market on Close” was designed to capture the price of oil closest to the market price, but the period in which the firm asses prices is only 30 minutes long and “generally involves very few market players.”
If no trades are made during that window, Platts uses bids or offers as indicators of the price at which market participants were willing to buy or sell. The review of transactions for physical Brent crude oil, or its derivatives, leads to the Dated Brent price. It is in that time slot that companies can make false, inaccurate, or misleading trades.
“Defendants have the market power and ability to push Dated Brent prices in a particular direction by purposefully and selectively reporting false and misleading data for transactions,” stated the document. “BP and Shell each alone had the market power and ability to manipulate Dated Brent prices and price trends, and when acting with other Defendants their collusive market power and ability to manipulate Dated Brent prices was even greater and more disruptive.” One particular strategy they employed is known as “spoofing,” where an order capable of moving markets is placed only to be cancelled later.
One particular manipulation example cited in the complaint came in February 2011. Shell offered to sell shipments of Forties-blend crude, one of four grades used by Platts to determine the Dated Brent benchmark in order to keep prices “artificially low. On February 21, 2011, Morgan Stanley purchased one of the four cargoes sold, a total of 2.4 million barrels of crude. Shell’s trade to Morgan Stanley successfully drove the Forties assessment lower than where it otherwise would have been,” the plaintiffs said.
Then, three days later, the oil producer sold two Forties cargoes — or about 1.2 million barrels — during Platt’s pricing window at one dollar less than the trades that had occurred outside the pricing window. That move artificially drove down prices, which allegedly benefited Shell because the company had a large short position in the swap markets. That behavior was a violation of the U.S. antitrust statutes and the Commodity Exchange Act, the plaintiff traders argued. Brent is the North Sea benchmark used to price more than half the world’s crude oil, affecting the price of thousands of consumer products from gasoline to food.
“Crude oil is one of the most vital commodities in the world, serving as the essential product for modern end-use applications varying from household plastics to transportation,” read the complaint. “Brent Crude Oil is in high demand and serves as a benchmark for two-thirds of the world‘s internationally-traded crude oil supplies.” Still, despite the alleged ease of manipulation, “Brent is going to remain as the benchmark for the foreseeable future at least, because there is no real alternative to it at the moment,” independent oil economist Osamu Fujisawa told Bloomberg. “It’s very well established, and those who are exposed to it don’t really have a choice but to stick with it.”
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