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Platts faces challenge from online traders
London, 5th Apr 2001

  Which industry would risk allowing a few score reporters to set prices for billions of dollars worth of daily trade? The oil business does. For years it has relied on energy pricing service Platts to assess the value of crude and petroleum products for settling sales contracts and derivatives.

Now the New York-based subsidiary of publisher McGraw-Hill is facing a challenge from online trading outfits who want to establish their own pricing benchmarks. "We were slightly worried about online trading a couple of years ago. But we've become progressively less worried about it as a source of price transparency because of the sheer complexity of world oil markets and their lack of trading liquidity," said Neil Fleming, Platts editorial vice president.

Platts established itself as the benchmark for crude pricing in the early 1980s when Opec lost control of fixed prices and spot trading was established. Before Opec, the oil majors had set crude prices.

Despite the advent of online trading, Fleming thinks Platts' specialist price reporters, who make their market assessments by monitoring spot trade, will continue to play a leading role in pricing oil.

"The number of transactions taking place in the physical oil markets is very low and the only way you can produce a benchmark from an online trading system is to generate a volumetric average, which is very suspect in a thin market," he said in an interview.

In the oil market, spot prices establish benchmarks for physical contracts in hundreds of grades of crude and petroleum products around the world. The complexity of trade, where prices can move sharply between the purchase and delivery of oil, has made external price discovery essential.

Dozens of online trading systems have tried to set up business over the past two years. The most successful, Atlanta-based Intercontinental Exchange (ICE), an alliance of major oil companies and banks, has made inroads into the forward petroleum swaps trade. But Platts still rules when it comes to pricing physical oil.

Fleming says the company is about to go online with PlattsDirect, its own trading system, as a means of widening the net for the information his reporters plug into their daily market assessments.

Some in the oil industry worry that Platts wants to coerce them into using PlattsDirect if they want their trades taken into account for the service's market assessments. Fleming says not.

"PlattsDirect isn't an attempt to change habits. It's an additional offering so that if people want to trade online we're offering them a place to do it," he said. "We were not motivated by the desire to operate a trading system or compete with other such systems. We were motivated by our core business, which is collecting information, analysing it, and providing the most accurate price assessment we can."

ICE, he said, will have difficulty in establishing benchmarks despite its success in attracting trade since it opened for business last summer. "On ICE there are days in which, for any given instrument, nothing trades at all," he said. "If nothing trades it's impossible to construct a volumetric average. A benchmark has to appear on a regular basis."

Platts also can survive the growing use of futures exchanges as a pricing tool, said Fleming. For years, Platts physical prices for European heating oil and diesel have been set as a differential to London's International Petroleum Exchange gas oil contract.

Recently two of the world's biggest exporters, Saudi Arabia and Iran, have shifted sales contracts away from Platts to the IPE's BWAVE index, an average of Brent settlements. "Platts' job is to follow the markets and if BWAVE were to become to a widely accepted benchmark then we would expect a number of sub markets to arise - as indeed they are arising - and our job would be to report on those markets," said Fleming.

Saudi Arabia switched to BWAVE from Platts Dated Brent assessment because it was concerned that traders were manipulating the market in the thinly traded Dated Brent. Volatility has now switched to the monthly Saudi differential versus BWAVE. "It is also, of course, theoretically possible to manipulate the BWAVE and there is some evidence that that has been tried," said Fleming.
Source: Gulf News©

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05 April 2001 06:53:37 PM

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