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French Oil Company Total Says Agency's Method Manipulates Benchmark Pricing

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Total's complaint against Platts resembles allegations about Libor.

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France's Total (NYSE:TOT) has made a rare, open attack against energy pricing company Platts, asserting the latter's system for setting physical oil prices is erratic and does not always reflect the state of the market. Total's complaint, made in a letter released Oct. 9, resembles allegations about Libor, the benchmark interest rate governing many loans and bonds that regulators say was manipulated by Barclays and possibly other banks. In June, Barclays paid a $450 million fine.

As with Libor, the price of physical oil shipments is set in an insular, clubby atmosphere whose players do not discuss the underside of the system outside the room. The world learns about the price of physical oil, versus futures, only because private agencies call around to big trading houses like Glencore asking the price of their latest shipments. In June, traders revolted (paywall) and threatened a reporting boycott when financial regulators recommended a more transparent the system, which could have triggered chaos in one of the world's most important businesses. The recommendations were abandoned.

Against that backdrop, Total's assertions stand out.Total said that price rating agencies "deform the real price levels paid at every level of the price chain, including by the consumer." Specifically, the letter said, Platts at times posts different prices from everyone else in the market–higher when the group is lower, and lower when everyone else is higher. Platts, owned by McGraw-Hill (NYSE:MHP), handles 85%-90% of the world's pricing of physical crude, Total said. The other lead agencies are Argus Media and ICIS, a unit of Reed Elsevier (NYSE:ENL).

The prices they report have a chain reaction around the world. The Brent benchmark, for example, tied to a UK-produced grade of crude oil, is the lodestar for up to 70% of the world's petroleum including the output of Saudi Arabia, Venezuela, and Russia. The prices set for these crude types go on to influence the pricing of futures, and ultimately affect the price of gasoline at the pump.

"Platts … imposes a methodology that does not furnish a market price (based on the day's prices) but rather a price to the market," Total said in the letter to the International Organization of Securities Commissions (IOSCO), a group of financial regulators.

In terms of impact on the global market, Total said the pricing problems can hurt the health of companies in the industry, but do not threaten the global financial system because the daily rate of trading, at less than $250 billion, is far below the scale of banking transactions. "Margins for refiners and retailers as well as prices for end-users are directly impacted by erroneous prices," the company said. " … [But] given the size of the oil market relative to the rest of the financial market, the overall impact of such shifts is not likely to threaten the integrity of the financial system."




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