Monday, July 7, 2008

Setting of benchmark prices in the physical energy market prone to manipulation?

Reuters reports that Energy pricing agency Platts has put Lehman Brothers under temporary review that effectively excludes the firm from trading benchmark-setting oil contracts. In light of all this talk of speculators bidding commodity prices higher, it is interesting to note that pricing in the physical energy market is set by a series of bid, offer trades during a fixed half hour time window. This bares some similarity to the setting of another benchmark rate the LIBOR rate in London which determines the interbank lending rate. So let us ask: Is the setting of benchmark prices in the physical energy market prone to manipulation?

from Reuters:
Platts provides price benchmarks in a number of illiquid or opaque physical energy markets, often determining pricing through a series of bids, offers and trades during a half-hour "window."

Being under review from Platts prevents market players from participating in the daily price-setting process and restricts their ability to influence pricing. But such companies are free to seek buyers and sellers outside of Platts' trading platform.

Energy brokers in Singapore said they had seen no bids or offers from Lehman in recent sessions in the half-hour trading window used to set most Asia oil products and some crude values.

Lehman's last known bid was a partial cargo of Dubai crude on July 1, fixtures seen by Reuters showed.

source: Platts review bars Lehman from key oil trade window

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