This is going to bring the woo merchants out of the woodwork

Motorists may have been paying too much for their petrol because banks and other traders are likely to have tried to manipulate oil prices in the same way they rigged interest rates, an official report has warned.

Two different issues here.

1) Was the petrol price manipulated.

2) Petrol and oil are different things.

As to the first, the allegation, umm, it\’s not even that at present, supposition perhaps, is that because the wholesale petrol price is reported by Platts then perhaps it was open to manipulation in the same way as Libor. It could have been, certainly. Whether it was or not is something that will have to be proven.

I don\’t know the details of Platt\’s pricing mechanism but it is along the lines of Libor: collect as much information as you can from market participants, throw out the obviously dud prices and try to pin down what the actual price in the market is. If traders report prices that suit their books well, yes, that \”market\” price might well be influenced.

This is akin to the first set of Barclays Libor manipulation. Traders within the bank trying to get Libor up or down by 1 bps or 2 in order to suit what they have on their trading books. Given that these are futures markets (as well as physical) there\’s no reason at all to think that the manipulation will be all one way or another. In fact, we would expect, if manipulation there was/is, it to be down as often as up.

As to the second, you can see it in that headline which I\’ve quoted. Petrol and oil are different things. Platts petrol is where the refined petrol price is. The oil price is the crude oil price: the price before it goes into refineries.

OK, trivial distinction you might think. But there\’s long been a particular form of woo shouting that all this financialisation has pushed up the price of oil (note, not petrol, but the crude oil price) as more people speculate in it. As hundreds of billions flow into commodity funds then they drive the price of oil up. Therefore we must regulate commodity funds.

These two things will inevitably get confused. If there has been manipulation of the crude price it will be as with Platts petrol: down is as likely as up for it will be individual traders trying to manipulate to suit their own positions. Those positions being as likely to be long as short. This is absolutely not the same as more commodity trading leading to higher prices in general.

Although there will inevitably be some who insist that it is the same. Worth looking out for: I personally expect such nonsense to come from idiots like the World Development Movement. I really don\’t expect it to take long for them to claim that a supposition of manipulation means that they were right, increased speculation means higher prices.

They\’re just different things though, with different effects. Indeed, increased speculation makes manipulation much harder, doesn\’t it? It\’s benchmarks on thin markets that are easy to move, not prices on large and liquid markets.

11 thoughts on “This is going to bring the woo merchants out of the woodwork”

  1. Petrol in the UK is mostly marketed by the same company that refines it, surely? In which case, the wholesale petrol price isn’t going to be of particularly great importance outside of intra-company accounting…

    Tim adds: I’m pretty sure that’s not true. For example, I’ve certainly heard of “BP stations” selling Shell refined petrol. And the supermarkets don’t own any refineries….

  2. True enough for the supermarkets. When I worked on a Shell site the truck that came to fill it was a Shell truck while the Total over the road was filled from a Total truck, but things may have changed over the last 15 years…

  3. Pretty sure petrol is delivered to petrol stations from the nearest refinery (whoever owns that refinery).

  4. How did that fit with the special additives that iirc Shell used to claim? Added between the refinery and the truck?

    Also, with the main refiners all buying from each other on quantities that roughly equal sales, there’s still some kind of netting off to be expected…

  5. “Motorists may have been paying too much for their petrol because” successive Chancellors ” are likely to have tried to manipulate ” tax revenues, whilst claiming it’s all in a good cause.

  6. Having worked for 12-years in Crude and Products trading, I can perhaps add a little benefit here.

    Only about 40% of refinery output in terms of Petrol and Diesel is used by connected marketing companies (BP garages, etc.) equally a lot of refineries have what is know as exchange agreements where like-for-like replacements will be undertaken. This means that you could well have a BP tanker filling up on standard unleaded at a Shell refinery.

    The reason for this is that the refineries are not evenly spread across the country and the logistics cost may make it easier for you to fill up at the refinery of a company that is notionally a competitor. These exchange agreements tend to be reciprocal and are volume based rather than value based transactions, so not really price sensitive.

    On the manipulation of petrol prices through Platts, although they are the leading supplier of physical crude and products prices across Europe, they are not the only one and there is some overlap with Argus.

    Several years ago, traders felt that the Platts price was ‘off market’ for a specific and rather illiquid product and thus switched over to having contracts priced from the Argus quote.

    Pricing works both ways, if you are off market then traders will notice it and complain directly to Platts and if Platts don’t correct / adjust then they will lose customers for their Marketscan products.

    So there might be some misreporting of physical price, but if it was significant or of any duration it would be resolved by Platts themselves. Mostly this is done by having a ‘quiet word with the chaps’ and issuing a price correction.

  7. There have been worries for years that Platts or Argus prices might be open to manipulation. This has been stated many times by well informed people. It is only because, flawed as the system is, its all we have.

    However even if manipulation, the significance at the pump would be minimal, and there is no reason to assume that its always manipulated up. Traders sell cargoes of thousands of tons. A deviation of a dollar per ton would net them decent money, but be insinificant to the individual consumer.

    These prices are even relevant when a retailer is selling their own refined product as they will influence the pricing decisions.

  8. Thanks JG.

    So more than half the petrol sold in the UK (the 40% used by connected marketing companies plus the slice swapped between oil majors in volume-based deals) isn’t sold at a market price, but rather has one attributed for accounting and reporting purposes?

    It occurs to me that, in such a market, there would be strong incentives for the oil majors (since they refine all the petrol but only retail some of it) to maximise the reported wholesale petrol price across the industry, and minimise retail profits across the industry, by ensuring the price attributed to these non-market sales was as high as possible.

    Coincidentally, the oil majors regularly defend charges of excessive petrol pricing by pointing out how low/negative their petrol retail profits are.

  9. Coincidentally, the oil majors regularly defend charges of excessive petrol pricing by pointing out how low/negative their petrol retail profits are.

    It’s not the proportion of petrol retail profits (which are pretty negligible), it’s that various government ministers shouting about the cost of petrol overall being because of speculators, oil companies, petrol retailers, etc. when the biggest component of the petrol price is the 60% taken in VAT and Duty (including the VAT on the Duty).

    Fuckers! Time for lamp-posts and piano wire.

  10. JG – they’re all as bad as each other. Yes, of course the government does that. But people (other than recent immigrants from the US or Iran) don’t object to the price of petrol per se, but to changes in the price of petrol. Which, following the abolition of the fuel duty escalator, are driven by some combination of the oil industry and not by the government.

    Meanwhile, you’ve missed my point, which is that yes, I accept petrol retail profits are negligible – but it is strongly in oil majors’ interests for petrol retail profits to be negligible whilst profits further upstream are higher, rather than the other way round.

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