Spot Price Assessments; why they matter ?
The impact of spot deals and related swaps is not limited to Sellers and Buyers…
Exchanges (CME, Nymex, ICE…) used price assessments for Benchmarks and over-the-counter OTC financial layers.
Commodity Risk Managers and Hedgers use them to settle contracts and to place a market value on the portfolio they hold.
Economists and Analysts use them to identify trends and patterns in S/D.
Sovereign nations NOCs (National Oil Companies) use price assessments to set royalty payments, export tax duties or in the calculation of their export netback settlements with International Trading companies.
Platts proprietary model: the “Platts E-Window”.
The Market on Close (MOC) is the hallmark of Platts.
The MOC approach to methodology is centered towards the principle that price is a function of time.
From Platts Crude Oil Methodology and specs:
The MOC is a structured, highly transparent process in which bids, offers and transactions are communicated to Platts editors and published in real-time throughout the day until the market close.
The MOC system seeks to reflect transactable values prevailing at the respective
market close on a normal working day: 4:30 Pm local london time for 25-day cash
BFOE (Brent), and 3:15 Pm local ny time for cash WTI (Western Texas Intermediate) and mars. Platts derives these
values by tracking market evolution during the respective assessment window and
by making assessments that reflect the value at which a deal could or did take
place at the close of the market.
Only spot deals transacted during the MOC or failing bids and offers ( a partial window) within the MOC time window are used to assessed commodity prices, calculate spreads and triangulate the value of keys benchmarks. Essentially, this is what is done by an editor at Platts.
During the MOC, Bid and Offers are reported by buyer, sellers and brokers to Platts through Platts E-Window.
The price assessments have a clear arbitrary component since at the end of the day Platts editors always have the last word.
Platts says that:
- the data communicated to Platts must be verifiable.
- Participants must be reputable , non affiliated in good standing with their counterparts.
- Bid/Offers must be executable (but who can enforce a bid or an offer ?)
- Repeatable ( but Each cargo is different ! Grade, volume…)
- Incremental (move in step with the market)
All which facilitate orderly price discovery *
“Platts” settlement a fair and accurate process for marking daily commodity prices?
Arguably no in the Oil Markets because in the Platts proprietary model, the “Platts Window” prices assessments are limited to the Market on close (MOC) Weekdays.
In illiquid markets, market participants can elect to not report their trade with Platts and form a Dark-Pool with other participants.
If a transaction is made outside the MOC the Platts daily price assessment will simply not take account of it.
If the prices are inaccurate, there is a bias but at least everyone has the same bias so prices discovery mechanisms can be labelled as “transparent”.
In a world where pennies during milli-seconds are worth millions of dollars, a small group of big players** can;
1) Trade in the Dark-Pool market during the all the day (unreported deals done outside the MOC …)
2) Use the MOC to trade cargos to “raise the window” or wash trade to prompt other participants into buying/selling their positions.
3) Marking daily-to-Market their Trade book.
4) Offload their derivatives or physical position overnight .
5) Start again at step 1 the next day and so on.
High Volume ≠ Liquidity
My definition of Liquid markets are those where there are bids-offers at every price.
The Platts MOC e-window can have a lot of $ volume** while remaining very little liquid.
Traders love Liquid markets when they are wrong, so they can get out of their position without affecting the price !
They just prefer Illiquid markets when they have it right because the market tends to move quickly in their favor !
The MOC approach to methodology operates on the principle that price is a function of time (Market on Close). High volumes can give a false impression of high liquidity.
*Platts makes no representation or warranty as to the results to be obtained by market participants who elect to use Platts’ prices and indices as the basis for transactions.
**The minimum volume that Platts takes into consideration for cash Brent-BFOE assessment is 100,000 bbl per transaction. For WTI the minimum is 25,000 bbl
with a maximum of 600,000 bbl per transaction)
-The Trade Shipping and Finance Wizard
- Platts a major player in setting oil prices (theglobeandmail.com)
© 2013, The Trade Shipping and Finance Wizard