05/16/2013 07:25 am ET Updated Jul 16, 2013

EU's Oil Probe Years Overdue. Targets Wrong Benchmark

The European antitrust authorities have finally carried out
inspections of oil firms in three countries, as well as the offices of the
price-index publisher Platts to determine whether the oil firms with the
cognizance of Platts distorted published prices of crude oil and
petroleum products. It is a first step, long overdue, but it targets the
wrong benchmark.

Platts serves as a guidepost for realtime pricing of physical product,
prices nuanced by such factors as grade, port of loading, and on, and
can have wide impact on day to day pricing differences. Yet their impact
on the pricing structure of the oil trade is marginal at best usually
in terms small change.

The core of the world traded price of oil is determined on the
commodity exchanges by such benchmarks as Brent Crude (Europe and
generally international) and West Texas Intermediate (WTI) for the
American market. The prices quoted on the exchanges lend themselves to
vast distortion, in tens of dollars per barrel and near billions of
dollars on a daily basis worldwide, through speculation if not outright
manipulation. Prices that have left all vestige of supply and demand.
Over 70% of the trading done on the exchanges is done not by producers
nor users hedging their production or consumption needs, but by
speculators and traders who neither produce nor consume the oil they
trade through the exchanges. As a grim example of the dimension of the
issue at hand the Wall Street Journal reported on April 19th ("Traders Slip On Brent
Oil Bet
") that the Brent futures contracts alone, held by "investors"
on March 8 of this year, was 1.58 million contracts (a record). Consider
each contract represents 1,000 barrels of oil. The world's daily
consumption of oil is some 85 million barrels. You do the math.

This corner has tried to bring light to this issue through a series of posts including the following:

One can only hope that the European Authority's probe is but a first
step and extends not only to oil companies but to active oil traders
such as the banks (Morgan Stanley, JPMorgan Chase, Goldman Sachs, and
others as well as the trading desks of the varied oil companies
themselves as well as the trading houses active in the field such as
Glencore, Vitol, et al to determine for whom the trades are made, and
to what avail.