Platts, a key assessor of physical energy prices, appears to be treading on some thin industry ice.
Energy traders are reportedly up in arms over the group’s planned changes to its pricing methodology which would see it move the timing of some of its US over-the-counter assessments to 3.15 pm from 2.30pm US central time. Platts’ reasoning for the move is as follows:
Platts’ assessments for Americas crude oil and refined products reflect transactable value as of 3:15pm ET as evidenced by fixed-price activity and/or differentials/EFPs to futures markets. But the underlying futures basis in those markets that trade as differentials/EFPs reflect a time of 2:30 pm ET. Market volatility in the 45 minutes separating both processes is an issue where Platts has responded by proposing to synchronize the assessment process to the same time basis of 3:15 pm ET.
What that infers is that Platts is unhappy with the current system which allows OTC trades in the NYMEX light crude contract, RBOB and Heating Oil to be priced at 2.30 pm for fixed-price assessment settlements, but at 3:15 pm for differentials like WTI-Brent spreads, cracks etc .
The hint being that between 2.30 and 3.15, there is scope for players to manipulate prices. Or as Platts puts it:
In the Americas, most physical refined products trade at a differential to an underlying NYMEX oil futures contract: light sweet crude oil, New York Harbor RBOB gasoline barges, or New York Harbor heating oil barges.
The combined use of 3:15 pm ET cash differentials and 2:30 pm ET futures values may lead to pricing anomalies affecting crude-to-product spreads and product-to-product spreads. Platts is committed to ensure its assessment processes are harmonized to ensure its assessment processes are robust.
The anomaly, by the way, transpired when Nymex decided to move to fully electronic trading:
On June 12, 2006, NYMEX energy futures began trading side-by-side in the traditional open outcry system on the exchange floor and electronically on the Chicago Mercantile Exchange’s Globex electronic trading platform. From that point onwards, electronic trade on Globex/NYMEX futures did not stop after the 2:30 pm ET settlement.
Platts assessments that used the NYMEX light crude contract, RBOB and Heating Oil to arrive at a fixed-price assessment continued to use futures settlements, which typically reflect 2:30 pm ET, while the differentials were basis 3:15 pm ET. This development led market participants to question the use of the 2:30 pm ET NYMEX settlement in Platts Americas oil and refined product assessments. As a result, Platts is planning to use the NYMEX/Globex futures prices prevailing at 3:15 pm ET for its assessments instead of the 2:30 pm ET NYMEX settlement.
Oil traders are up in arms over the change, but the insist this has nothing to do with manipulation – arguging instead that it throws all sorts of hedging arrangements into confusion. In fact the matter has even been taken up with the US commodities regulator the CFTC. Industry wire OPIS reports :
A group of oil companies is expected to file a petition against the plan by Platts to use NYMEX oil settlements at 3:15 p.m. for its physical price assessments to the Commodity Futures Trading Commission and the chief executive of Platts, industry sources told OPIS on Tuesday.
This was decided during a conference call held by NYMEX with more than 10 trading companies and refiners Tuesday afternoon. “Everyone has different views about what should be done,” a source said about the conference call. “Everyone is going to petition (against the Platts’ settlement change) to CFTC and Platts’ CEO.” It is unclear if these companies would petition individually or together.
The petition was in response to Platts’ announcement earlier today that it will go ahead with its proposal to adjust its physical price methodologies, which include assessing its own NYMEX oil settlements at 3:15 p.m. Eastern Time instead of using NYMEX settles at 2:30 p.m. Traders had expressed concerns about the impact of the Platts’ methodology change, citing that it could cause hedging problems due to the time and price discrepancy between NYMEX’s actual settles and Platts’ physical price assessments.
Specifically on the issue of manipulation or “stale price arbitrage” as they call it:
Traders do not agree with Platts’ explanation that the alignment of its physical assessments and paper settlements would eliminate stale price arbitrage, which traders said did not exist. NYMEX said on Tuesday that it is still discussing the matter with the industry, and it has not reached any final decision.
During the NYMEX conference call with the oil companies, NYMEX indicated that the paper trading volume in the oil market is significantly higher than the physical volume. This is likely to be critical to NYMEX’s final decision on whether to stay put at 2:30 p.m. or to move to align with Platts at 3:15 p.m.