• Steve H. Hanke
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    Authored by Steve H. Hanke of The Johns Hopkins University. Follow him on Twitter @Steve_Hanke. A few weeks ago, the Monetary Authority of Singapore (MAS) sprang a surprise. It announced that a...

LIBOR-gate Comes To Crude: Total Exposes Price Fixing In The Energy Market

Tyler Durden's picture




 

While the recent revelations of multi-year LIBOR manipulation (but, but how was that possible: it involved thousands of people, operating for years, manipulating numbers - all the traditional reasons presented against conspiracy theory crackpots alleging that manipulation may be going on here, or there, or at the BLS, or somewhere), which we had said had been happening for the past 3 years, confirmed that the entire rate-based derivative market was a giant scam, at least one market spared from cartel whistleblower, i.e., insider, humiliation, was the commodities market. No longer. As the FT first reported, a Swiss trading office of Total Oil Trading sent a response letter to IOSCO (the International Organization of Securities Commissions), alleging that the same kinds of market "pricing" shennanigans that have been now exposed to have taken place over bottles of Bollinger, may have been pervasive in the crude market as well.

From the letter which may have set off the same avalanche in the energy markets as the Barclays "settlement" did for rates:

TOTAL is a subscriber to the major PRA services for the energy markets (oil, gas, coal, power, CO2, and biofuels). The work done by the PRAs can generally be considered conscientious and professional. However, the published prices do not always represent those of the market with the same degree of accuracy. This heterogeneity exists both within individual PRAs and between PRAs. As well, the quality of the reporting is not always consistent over time. Finally, while certain PRAs have pricing processes that are reproducible using the underlying data, others do not (the principal difference being the use of “judgement” that may bias prices away rather than toward the market).

Barclays (only one bank for now, soon many others) already showed us in all too criminal (yet neither admitting nor denying guilt) terms what "judgment" means in the context of conflict of "interest rate" price setting. It means precisely the same in the energy market.

And while it was the BBA in the role of ringleader for the Libor scandal, it appears when it comes to commodity price fixing, the entity behind the scenes is Platts:

Very approximately, for all transactions linked to PRA prices, Platts represent 90% to 95% of transactions on crude 85% to 90% of transactions on products, and 85% to 90% of OTC derivative transactions. The remaining share is covered by Argus and other PRAs which are present in niche markets.

 

Traders, buyers, and marketers depend upon the PRA prices as a source of market references for on-going transactions. Oil market players contribute to the price assessment process by reporting their deals (ensuring the assessed prices take them into account). This interdependence between the PRAs and the oil market players defines the price discovery process.

 

Platts (the dominant price reporting agency) imposes a methodology that does not furnish a market price (based on the day’s prices) but rather a price to the market.

 

Sometimes the criteria imposed by PRAs do not assure an accurate representation of the market and consequently deform the real price levels paid at every level of the price chain, including by the consumer. The difference in methodologies between Platts and Argus is the greater integration of the shape of the forward price curve by Platts than by Argus (or ICIS or APPI, etc). Accordingly, when the market is in strong backwardation, Platts spot prices are lower than the rest and in contango they are higher.

 

Inaccurate pricing is not simply an issue regarding the pricing of OTC contracts. Margins for refiners and retailers as well as prices for end-users are directly impacted by erroneous prices.

The conclusion:

Where these margins are particularly narrow (such as in Europe) the volatility and uncertainty in PRA pricing methodologies can be very detrimental to the financial health of the companies concerned.

We doubt we need to get into the nuances of what happens when a cartel marks prices to a central distribution warehouse instead of market (we have done that already for the CDS market and for LIBOR), and what happens when surreality can no longer be sustained and all these market trading vehciles have to reprice to fair market values. Can one spell margin call driven liquidations?

And there you have it: while the commodity cartel had managed to keep quiet in the golden years, when everyone was making money, now that it is time to cull the competition, one by one the cartel members are stepping up and breaching the fundamental rule of the prisoner's dillemma: don't defect.

And just like in the Libor scandal one defection was enough to destroy the entire Libor-based market, so Total likely set the precedent for everyone else to follow suit and expose their competitors for unfair and potentially illlegal practices. Because if they don't do it first, the risk is someone else will do it to them. Finally, remember that in the new normal, a banker is a lawyer's biggest... enemy.

This is the FT's assessment as well, which unsurprisingly exposes the same key cities as have dominated the LIBOR scandal:

The unusually candid public comments by the trading arm of Total have broken the omertà of the energy physical trading industry, a close-knit community in London, Geneva, Singapore and Houston where disputes are usually settled in private.

And for those curious just who the commodity "cartel" consists of, here are some names that would prefer Total never existed (all of which provided response letters to IOSCO praising the pricing mechanism... of course):

  • ISDA
  • CME
  • ICE
  • Saudi Aramco
  • BP
  • ARGUS
  • API
  • GFMA
  • IBGE
  • CEAG
  • IATA
  • ICIS
  • LEBA
  • Platts

Or, in other words, the entire energy market status quo.

Full Total letter (pdf)

 

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Tue, 10/09/2012 - 11:41 | 2871259 Duke of Con Dao
Duke of Con Dao's picture

the White House response to this is, again...

YouTube - Obama on Romney in 7 Seconds   {same, same}

Tue, 10/09/2012 - 11:45 | 2871269 Ahmeexnal
Ahmeexnal's picture

German citizens selling their gold to get their basic needs:

http://www.thelocal.de/society/20121009-45439.html

 

Two 14-year-old German boys have been charged with stealing €3,000 worth of jewellery from one of their mothers, to pay for a visit to a brothel. Police said the boys were still grinning as they were being questioned.

Caught in a "delirium of hormones," as a police statement on Monday put it, the two boys got only a tenth of the value of the jewels when they sold them to a canny gold dealer.

DUI, Kraut style:

http://www.thelocal.de/society/20121009-45447.html

 

A 74-year-old retiree in the German city of Wolfsburg tried to outrun a cop car after taking her electric wheelchair out for a drunken joy ride on the open road, police said on Monday.

The woman had a blood alcohol level of 0.174 percent (1.74 promille) when she steered her motorised chair onto a four-lane road.

Tue, 10/09/2012 - 11:46 | 2871286 Gully Foyle
Gully Foyle's picture

Ahmeexnal

You mean family heirloom Gold Jew teeth right?

Tue, 10/09/2012 - 14:05 | 2871796 Bunga Bunga
Bunga Bunga's picture

I thought you can't eat gold.

Tue, 10/09/2012 - 11:46 | 2871287 JPM Hater001
JPM Hater001's picture

Repeating a quote 5 minutes apart is bad enough but up arrowing yourself first is despicable...

Tue, 10/09/2012 - 11:48 | 2871302 Gully Foyle
Gully Foyle's picture

Duke of Con Dao

Dude, the killer is Obama already blamed energy prices on speculators manipulating the market.

That means a lot of heads will explode here because Barry called one right.


Tue, 10/09/2012 - 12:38 | 2871473 CPL
CPL's picture

Who gives a shit what the US sock puppet show does...something fairly important that effects everyone on the planet is happening.  Go post it on twitter or something.

 

Would this mean that anyone that's filled up their gas tank get to launch a class action suit to the companies and any prior equity holders of the list of energy companies on the list?

Which is all of them and by proxy any equity or bond holder that profited from the scam?  Including sovereign governments?

 

If true...then we could all sue back the country.

 

 

Tue, 10/09/2012 - 11:44 | 2871261 francis_sawyer
francis_sawyer's picture

Oh shit... When this got exposed with LIBOR, the next thing you know people were getting killed in a movie theatre in Colorado...

Tue, 10/09/2012 - 11:45 | 2871283 Dr. Richard Head
Dr. Richard Head's picture

Well, Monsanto was accused of price fixing years back and that sure held back their abitions now didn't it?

Tue, 10/09/2012 - 11:49 | 2871304 ParkAveFlasher
ParkAveFlasher's picture

Price fixing is inevitable in a pure fiat system.  It is necessity because capital misallocates by nature of the system, creating imbalances that need plugging and fixing. 

Tue, 10/09/2012 - 11:53 | 2871327 Dr. Richard Head
Dr. Richard Head's picture

Meanwhile, actual workers never get to experience the full value of their labor.

Fiat, it's what fucks you.

Tue, 10/09/2012 - 12:53 | 2871539 True.North
True.North's picture

I need that as a bumpersticker.

Tue, 10/09/2012 - 13:52 | 2871749 SelfGov
SelfGov's picture

So were prices fixed up or down?

It looks like both...

Tue, 10/09/2012 - 11:58 | 2871344 Gully Foyle
Gully Foyle's picture

ParkAveFlasher

What the fuck kind of blather is that!

Pricefixing will exist anytime two or more people enter into a conspiracy to profit from others.

It's human nature to cheat for an advantage.

It's most likely animal nature to cheat for an advantage and hard wired very deeply in the brain.

Tue, 10/09/2012 - 12:45 | 2871400 ParkAveFlasher
ParkAveFlasher's picture

Gully Foyle aka Funk Master BoldCaps, I don't entirely disagree with you about human nature but you are a hair trigger bold-facer.

In a fiat system, there is an infinite maze of fixes that are unavoidable even among honest people in transaction.  You can not help but to lie or at least traffic in some falsehood. 

edit: In a fiat system, the denomination itself has sinking value, because the very existence of interest rates in a fiat system require more units of currency issued into the economy.  Thus, all dollars are shrinky-dinks in an inflationary oven.  It's a promise, it's a debt instrument.

In a gold system, you are reducing to a single, universal fix, thus creating a single comparison that reflects the true or false basis of any single transaction.  There are no overhanging promises of value returned in the transaction, you simply transact.  You reduce the human variables sourced by the currency issuer.  You don't reduce all human variables, but a great deal of the most insidious and nefarious of them. 

Gold standards do not remove theivery and advantage-taking.  Gold standards promote profit pursuit - in the marketplace first.  Convertibility itself - the most extreme form of gold standard - greatly reduces the power of the currency issuer to fix prices via infinite issuance of currency. 

 

 

Tue, 10/09/2012 - 11:47 | 2871293 Gully Foyle
Gully Foyle's picture

francis_sawyer

Goddamn that overpriced movie popcorn!

Tue, 10/09/2012 - 12:07 | 2871378 francis_sawyer
francis_sawyer's picture

More like the NFL, or new season of DWTS hadn't started when the LIBOR story broke... 

Tue, 10/09/2012 - 11:42 | 2871262 pragmatic hobo
pragmatic hobo's picture

"market "pricing" shennanigans ... may have been pervasive in the crude market as well. "

uhm, geez, I'm shocked.

Tue, 10/09/2012 - 11:45 | 2871276 JPM Hater001
JPM Hater001's picture

*yawn...

Wake me when you find an honest segment of the world market economy.

Tue, 10/09/2012 - 11:48 | 2871297 johnQpublic
johnQpublic's picture

oo oo i got one!

your local weed dealer

an honest criminal , so long as the weed is indeed weed

Tue, 10/09/2012 - 11:50 | 2871308 JPM Hater001
JPM Hater001's picture

Bravo.  A true example of where reputation and lack of regulation breed quality business values.

Tue, 10/09/2012 - 12:03 | 2871363 LULZBank
LULZBank's picture

You conspiracy loon doomers are missing out on the real stuff happening out there in the real world.

You guys need to get a life and this vest!

http://tech.uk.msn.com/features/like-a-hug-facebook-vest-gives-you-a-hug

Tue, 10/09/2012 - 11:45 | 2871280 Xibalba
Xibalba's picture

next we're gonna find out that metals are manipulated...cough

Tue, 10/09/2012 - 11:50 | 2871307 Gully Foyle
Gully Foyle's picture

Xibalba

If metals aren't manipulated you can't be a Blacksmith.

Tue, 10/09/2012 - 11:45 | 2871281 JustObserving
JustObserving's picture

No one will expose the price fixing in the gold and silver market.  The CFTC has been looking at silver trading for over 4 years now and has found nothing wrong so far to disclose.  They will look for a decade and find nothing.  It is heartening to know there is no fraud or corruption in gold and silver markets - just every other market is corrupt.

Tue, 10/09/2012 - 11:50 | 2871282 hedgeless_horseman
hedgeless_horseman's picture

 

 

...while the commodity cartel had managed to keep quiet in the golden years, when everyone was making money, now that it is time to cull the competition...

Does anyone really believe that the true Saudi oil production looks much different than this?

Which is why it is odd for me to see the price of unleaded locked-in at $2.49 for the last three months in my home town.

Brace for after the Red Team Versus Blue Team Intrasquad Selections.

Tue, 10/09/2012 - 11:57 | 2871341 Cognitive Dissonance
Cognitive Dissonance's picture

"Does anyone really believe that the true Saudi oil production looks much different than this?"

But....but......but.....it's Saudi Arabia.

<Never mind. I can't do this with a straight face.>

http://www.youtube.com/watch?v=Vpl1thmTJwE

Tue, 10/09/2012 - 12:10 | 2871386 LawsofPhysics
LawsofPhysics's picture

The productivity of a gas well is even worse.

Tue, 10/09/2012 - 13:09 | 2871586 disabledvet
disabledvet's picture

We can only hope cuz that ain't true of US production...

Tue, 10/09/2012 - 13:34 | 2871679 Totentänzerlied
Totentänzerlied's picture

$2.49 or $4.29 ?????????

Tue, 10/09/2012 - 14:14 | 2871838 hedgeless_horseman
hedgeless_horseman's picture

 

 

$3.49

Tue, 10/09/2012 - 11:46 | 2871284 johnQpublic
johnQpublic's picture

on days like today, i am once again vindicated

conspiracies are being proven true so fast and furious(pun intended) these days, i challenge you to come up with something that ISN'T a damn conspiracy

Tue, 10/09/2012 - 11:48 | 2871298 JPM Hater001
JPM Hater001's picture

Congratulations...Now can you finish shining my shoes?

Tue, 10/09/2012 - 11:58 | 2871343 Urban Redneck
Urban Redneck's picture

This is actual oil trading, not paper oil trading. It has always been a BLACK ART.

Tue, 10/09/2012 - 12:46 | 2871511 Mikehy
Mikehy's picture

its also historically been private and confidential business. Which is why you need a price discovery platform like Platts. I think this sounds like someone at Total got burned on a settle and they decided to be very French about it.

Tue, 10/09/2012 - 11:48 | 2871285 No Euros please...
No Euros please we&#039;re British's picture

Nah, I just don't believe it. Oil prices manipulated! These conspiracy theorists will be claiming that gold and silver price is manipulated next!! And THAT is fully regulated and everything by those observant and vigilant regulators...........err somewhere I guess.

Tue, 10/09/2012 - 11:47 | 2871292 hampsterwheel
hampsterwheel's picture

have to hand it to them - they have keep the plates spinning a lot longer than I could have imagined... we live in a world of make believe - nothing is priced as it should be and there is no risk of failure ever, from Greece to GM, nothing will ever fail again, no one will ever default on a loan again, debt is meaningless  - trillions of digitial currency can be created out of thin air without anything going up in price - I am beginning to believe that in fact the world can live on inflated fiat money for another few decades or forever without the market ever becoming real again...

Man has finally figured out how to finally defeat the free market and manage all aspects of human commerce - what an amazing thing to witness -

Tue, 10/09/2012 - 11:54 | 2871330 Gully Foyle
Gully Foyle's picture

hampsterwheel

Dude it's all numbers on a server.

Ever notice how shit was running smoothly everywhere BEFORE BIGMONEY became involved with directing worldwide governments?

The problem real world people think all this shit is like their check book, where bossman hands some dinero which you are required to divvy up back to corporate world.

In bank world those numbers mean shit cause they are nothing more than video game numbers.

You are a link in the viscious cricle of corporate world.

They are the ones spinning that circle.

Tue, 10/09/2012 - 13:07 | 2871583 disabledvet
disabledvet's picture

There is only one Government on the face of the earth that can afford nuclear power right now...

Tue, 10/09/2012 - 11:48 | 2871303 lolmao500
lolmao500's picture

Last news that came out about it a few years ago... JPMorgan was responsible for 90% of the oil price manipulation when it spiked in 2008 and if I remember correctly, it was even on BLOOMBERG of all places...

Tue, 10/09/2012 - 13:05 | 2871574 disabledvet
disabledvet's picture

To be expected. "Say hello to your London Whale" Jamie Dimon.

Tue, 10/09/2012 - 11:58 | 2871312 Democratic koolaid
Democratic koolaid's picture

Anyone who thinks anything in the energy sector is a bad buy need to lay of the Kool-aid.  World energy consumption will steadily grow especialy considering large area of so called "undeveloped world" remain at this point.

Tue, 10/09/2012 - 12:46 | 2871505 q99x2
q99x2's picture

Except for the global recession and the likelihood of human depopulation therefrom and the largest reserve discovery, larger than that of Saudi Arabia, in the South China Sea and the tech to convert shale oil now available and the decrease in the price of renewables that currently allow Germany to produce a quarter of its peak energy demands on a cool winter day in the upper latitudes of the northern hemisphere you most simple minded one.

Tue, 10/09/2012 - 11:51 | 2871314 resurger
resurger's picture

Samoe Ol Mother Fuckers'

 

Tue, 10/09/2012 - 11:51 | 2871315 bidaskspread
bidaskspread's picture

Platts is part of the same organization as S&P. What did you expect from a company that rates subprime mortgages as triple AAA.

Tue, 10/09/2012 - 11:57 | 2871340 ParkAveFlasher
ParkAveFlasher's picture

A house in the suburbs can not hold its value over the life of a mortgage if gasoline is $10/gallon.  By insuring oil pricing, this is how they were able to rate mortgages highly.  It's a self-fulfilling prophecy.

In a fiat system, when you fix any single price, you introduce a cascade of distortions.  To fix any single price is to distort all prices. 

 

Tue, 10/09/2012 - 13:01 | 2871557 disabledvet
disabledvet's picture

If I can sell ethanol or biodiesel for a dollar a gallon...PROBLEM SOLVED.

Tue, 10/09/2012 - 13:02 | 2871558 disabledvet
disabledvet's picture

STAY long chemical companies...if you haven't bought yet...I'd say buy.

Tue, 10/09/2012 - 14:12 | 2871833 ParkAveFlasher
ParkAveFlasher's picture

Your premise is shaky.  You would have to grow 10 times more corn in order to replace the market, even more than that because ethanol does not return the same energy per volume unit as gasoline does.  By committing corn supply to ethanol production you are impacting the food markets.  US Corn is what, 40% of the world market?  THat's a lot of Crispix you are taking off the shelves.

Tue, 10/09/2012 - 11:53 | 2871325 hampsterwheel
hampsterwheel's picture

The CFTC is the government - why would they expose themselves - GS, JPM, BofA and Citi are the government - simple front men for the system. Occupy wall street is 1/2 right in targeting the banks - but they aren't taking it to the next level - the banks are the government and the government is the banks - destroy GS and it simply opens under another name - by blaming just wall street and the banks is to set yourself up for believing the Government when the system collapses into believing that Captialism all along was evil and was the root of all this misery, and the government will see to it that that doesn't happen again ...then the conquest will be complete...

We occupy a wicked period of human history - or maybe it has always been so, but at least 150 years ago you could get in your wagon and go somewhere without cameras...and people asking you how you came to have so much money on your person...

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