THE WALL STREET JOURNAL/DOW JONES NEWSWIRES: Shell Removes Traders From Oil Price Reporting Chain: “Shell Trading, a unit of Royal Dutch/Shell Group (RD,SC), will no longer allow its traders to report transactions done in the over the counter crude oil markets to publishers that produce indexes.” (ShellNews.net)
By KATYA KAZAKINA and KRISTEN MCNAMARA
Posted October 14, 2004
Of DOW JONES NEWSWIRES
NEW YORK -- Shell Trading, a unit of Royal Dutch/Shell Group (RD,SC), will no longer allow its traders to report transactions done in the over the counter crude oil markets to publishers that produce indexes.
Instead, the company's risk control group will distribute details of trades in writing to publishers, whose indexes are used to value billions of dollars in energy contracts.
A number of companies have taken similar steps to reduce opportunities for traders to manipulate U.S. natural gas and power markets following a rash of scandals that led to millions of dollars in fines. But Shell is the first major company to implement such changes broadly in the much larger and less regulated oil markets.
Wider adoption of Shell 's more formal process of reporting prices could improve the transparency of markets for physical oil at a time when prices have soared past $50 a barrel. The change is also seen as a prudent risk-management move for companies vulnerable to charges their traders manipulated markets.
"It is signficant," said Mark Routt, a senior analyst at Energy Security Analysis Inc. "This is not driven by the quality or the value of the data as much as it is by the risk of not doing it."
No Discussing Deals
As of Oct. 1, Shell traders can't discuss spot market prices or details of their transactions with reporters, spokeswoman Lisa Givert said. They are free to discuss market sentiment. Shell hasn't yet begun distributing prices from its risk group, but is setting up the process. The company said the shift reflects "the continually changing external regulatory environment."
At issue is the way energy contracts are valued in over the counter markets. With no formal exchange to look to, publishers like Platts have historically surveyed traders for the details of their transactions and used that information to create indexes that represent the value of a grade of oil at a particular time and place.
That system is now recognized as vulnerable to manipulation, as traders have a financial interest in where the indexes come out. Companies that deal U.S. power and gas largely stopped their traders from talking to publishers in late 2002, following allegations traders at a number of companies reported false prices.
The U.S. Commodity Futures Trading Commission has settled false reporting allegations against more than two dozen companies for more than $250 million.
Oil-market participants, however, have long insisted their more mature markets aren't vulnerable to such abuse, and oil price reporters have continued to gather information from traders. Thus far, no manipulation charges have cropped up on the oil side.
Platts Defends Methods
Platts, a unit of McGraw-Hill Cos. (MHP) and the leading oil-market pricing service, insists it uses only complete and accurate data in its oil price assessments. Still, the publisher supports Shell 's move.
"We're pleased that any company takes steps to ensure the timely flow of data continues while ensuring the data is complete, true and accurate," spokesman James Keener said.
Platts hasn't seen oil companies other than Shell alter their reporting practices, but understands some have discussed possible changes, Keener said.
Exxon Mobil Corp. (XOM) took a partial step toward the end of 2002 by reporting key crude product and feedstock prices in writing from a designated trading group, spokeswoman Prem Nair said.
Platts has significantly reworked its method for assessing Asian benchmark Dubai crude and European benchmark Brent in recent years to limit opportunities for market manipulation stemming from declining volumes of those grades. The moves have drawn some criticism, but Platts said they give a more accurate view of the market.
Dow Jones Newswires, a unit of Dow Jones & Co. (DJ), also assess oil prices by surveying traders.
Removing traders from the reporting chain removes their incentive to try to push prices in their favor, said R. Martin Chavez, founder of SunGard Kiodex, a risk-management technology and services provider.
"The same principle applies for crude as for natgas," he said. "Don't give people the power to calculate their bonus. And if you do give them that power, don't be surprised when they calculate the biggest possible number."
-By Katya Kazakina, Dow Jones Newswires; 201-938-4427; email@example.com
-By Kristen McNamara, Dow Jones Newswires; 201-938-2061; firstname.lastname@example.org