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
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
"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
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,"
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©