Will Oil Prices be the Next Manipulation Scandal?

Now that the Libor manipulation scandal has been revealed, it looks like oil prices could be the focus of the next search for misreporting.

According to the International Organization of Securities Commissions (IOSCO), the current system of oil price reporting is "susceptible to manipulation or distortion."

Comparisons to Libor manipulation have been made because oil prices, such as Brent, serve as a benchmark for trillions of dollars of securities and contracts.

There is the potential for market participants to manipulate oil price assessments published by price-reporting agencies (PRA) through the submission of false information and selective reporting of deals.

Traders at various banks voluntarily report the prices they pay for oil contracts to Platts and other PRAs. Platts, which provides the most influential assessment, uses a number of trades to decide what the benchmark price, quoted to the outside world, should be.

That is where the trouble begins.

G-20 Investigates Oil Prices

As with Libor rates, the fate of oil prices is left to be decided by a very small amount of people whose decisions impact millions.

That's why in late 2010 G-20 leaders wanted to know if oil prices were being manipulated.

The group commissioned the International Energy Agency (IEA), the International Energy Forum (IEF), the IOSCO and the Organization of Petroleum Exporting Countries (OPEC) to produce a joint report on how oil spot market prices are assessed by oil price reporting agencies and how this affects the transparency and functioning of oil markets.

Then at the 2011 Cannes G-20 summit the leaders asked the commission to prepare recommendations to improve the functioning and oversight of oil price reporting agencies by mid-2012.

The report, spearheaded by the IOSCO, sets to find out if and how oil prices are manipulated and the consequences of such actions.

How Oil Prices Could Be Manipulated

So far the report has gone as far as to identify potential areas for concern that could lead to oil price manipulation.

The report states, "Such issues include, among others, the adequacy of a commodity derivatives contract's design, the accuracy and integrity of price formation in a commodity derivatives contract that references a potentially deficient price assessment, the transparency of the various factors impacting oil derivatives pricing including PRA assessment processes and the susceptibility of an oil derivatives contract to manipulation."

The commission's aim is to eliminate, to the extent possible, how susceptible a commodity derivatives contract is to price manipulation. That involves looking closely at the data used to construct the price, and evaluate how vulnerable it is to distortion.

The committee acknowledged that certain discretion may be required to assess spot crude markets. But the fact that such processes are a judgment exercise keeps the door open for manipulation or other abusive conduct to influence price assessments.

Platts says "there is absolutely no similarity" between Libor and oil and that its competition with other PRAs distinguishes this from Libor, which is regulated by just the British Banker's Association.

However, the IOSCO has warned that there are insufficient safeguards to prevent collusion between two or more banks, which is currently suspected in the Libor scandal.

IOSCO submitted a report update containing its preliminary findings to the G20 in June. The full report on oil prices and manipulation is currently scheduled to be published in time for the G20's next summit in November.

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