U.S. Oil Price Manipulation Investigation

Brian Hicks

Written By Brian Hicks

Posted June 26, 2013

The U.S. Federal Trade Commission (FTC) has opened a formal investigation into crude and refined oil prices on the heels of a similar inquiry by the European Union (EU). The focus will be on how prices of crude oil and petroleum-derived products are set.

The bottom line: was there, and is there, manipulation taking place?

oil price Nov 30For now, the FTC is closely monitoring the progress of its European counterpart as it makes its own inquiries and enters the preliminary stages of its investigation. It could soon broaden the investigation in scope in much the same way it has been in Europe.

The FTC, which regularly monitors both wholesale and retail gas prices in the U.S. to look for any signs of foul play, has been assigned the task in accordance with the Justice Department’s antitrust division. By granting this task to the FTC, it indicates that U.S. regulators don’t see any possible violations as criminal acts.

This latest probe is part of a growing number of similar inquiries being made by both the EU and the U.S. that includes the London Interbank Offered Rate, or Libor, standard essential patents and Internet search manipulation, and merger reviews of both the music and airline industries.

The extent to which both sides can collaborate relies on how accommodating the companies in question are willing to be. A waiver needs to be signed to allow data sharing between the EU and the U.S.

In a separate matter, the U.S. Commodity Futures Trading Commission is reviewing complaints it has received in regards to false bidding and offers made in the West Texas Intermediate crude oil market.

This practice, commonly referred to as “spoofing,” is illegal, and it occurs when a bid or offer is put in with the sole intent of canceling it before the trade is carried out. West Texas Intermediate is the world’s largest energy futures contract on CME Group Inc.’s (NASDAQ: CME) New York Mercantile Exchange.

Platts in Trouble

What likely will take place soon are agency-issued civil investigative demands, similar to a subpoena in criminal proceedings. This will allow the FTC to gather the information it needs to conduct its thorough investigation of those in question.

Platts, the energy news and data provider, will be at the top of the FTC’s list. The price-reporting company owned by McGraw Hill Financial Inc. (NYSE: MHFI) has the job of determining the cost of raw materials that influence pricing.

Platts is behind the Dated Brent benchmark assessment that contributes to setting prices of more than half the world’s oil. Platts seems to be in full cooperation and so far is working with investigators to ensure the data it has provided is effective and accurate.

Platts Dated Brent crude is found through the price of trades, bids, and offers based on four grades of North Sea crude oil and other related contracts. Using e-mails, phone calls, instant messaging, and Platts’ own electronic system called eWindow, calculations are made and presented each day at 4:30 pm London time.

In addition to the daily data presented, thousands of daily assessments are made by Platts and published on numerous commodities, all used to determine gasoline prices, diesel, biofuel, natural gas, electricity, and petrochemicals.

Gathering all of this data and years of Platts correspondence, if the company is found to be in violation during the investigation, manipulation could extend as far back as 2002.

If guilty of any wrongdoing, Platts and the energy market overall could find itself in some hot water. Platts handles as much as 95 percent of crude trading and as much as 90 percent of petroleum-based products, Bloomberg News reports.

Bloomberg LP, the parent of Bloomberg News, competes with Platts and other companies in providing energy market news and information. And it trickles down to you and me. I for one would be discouraged knowing I was reporting on a bunch of falsified information.

The European Union

The EU probe into similar matters reaches undisclosed crude-derived products and biofuels and how pricing in some markets don’t reflect financial products like stocks and U.S. corporate bonds. The present investigation marks the third time global pricing benchmarks have drawn question from EU regulators in the past year.

The EU has previously focused on Libor and the ISDAFix, the benchmark for the $379 trillion swaps market.

Last month, the offices of Statoil ASA (NYSE: STO), Royal Dutch Shell (NYSE: RDS-A), and BP plc (NYSE: BP) were all raided in an unannounced inspection with requests for their trading records. All of these companies have been implicated in violation of Europe’s antitrust laws by the European Commission.

The accusations include colluding and manipulating prices with data provided by Platts.

These companies, too, seem to be in compliance with the ongoing investigation.

If these accusations prove to be true, it will have caused great damage to the consumer in an already tumultuous economy.

In regards to spoofing, the U.K. Serious Fraud Office is considering it an urgent matter and is in the process of reviewing whether or not to open a criminal investigation.


Final Results

There are concerns that price disclosure could lead to legal action from antitrust regulators. The publicity that swarms around this matter, especially the manipulation from the big gun energy companies mentioned earlier, makes results all the more important.

But all seems quiet in the market despite the troubling news. There are no signs of manipulation occurring.

The rise of Brent crude oil to $111.89 a couple months ago did raise some concern, but some unusual occurrences were also on the radar. There was the death of Venezuelan President Hugo Chavez, an earthquake in Iran, and other factors that most likely contributed.

But overall, crude prices have been on a sharp incline in the past few years, leaving some experts to believe it has a lot to do with a manipulation somewhere in the markets.

The world’s financial systems and economies are tied together more tightly than ever before. Everything matters, everywhere, and it’s important to look at the economy from a global perspective – that’s why the FTC is so closely working with the EU.

It has an effect on everything from energy markets to investor confidence to manufacturing and even to the price of the food we eat.

If transportation costs increase because fuel sources like diesel go up in price, then so will your grocery bill. That’s why you’ve seen things like milk, eggs, and produce going up in price over the past few years.

Western civilization can afford a few cents on a gallon of milk, but in the developing world, this can have huge ramifications, and in extreme circumstances, a hike in food prices can lead to mass starvation.

Yes, that’s an extreme example, but it happens. If you want to take a closer look at home, just look at the gas your SUV is guzzling every week. That’s not getting any better.

All in all, it’s not going to be easy to pinpoint any violations, even if some of these companies did cross the line. The odds of them leaving a paper trail are unlikely.

But at the very least, it’s good to know someone is watching out for the pricing in these markets. Investors need to be made aware of market cheating and how one end of the financial spectrum can fall right onto the other. It’s a domino effect.

Don’t mess with our money.


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