China’s growing power in Asian oil trading has stirred up an unprecedented debate in this normally taciturn corner of world trade.
The public discussion reflects what is at stake: Asia has for years been the main growth engine for the world’s oil market, and China in particular has become its most important buyer as it chugged past the US to become the world’s largest oil importer.
This has given China enormous buying power which its large oil trading companies have had no qualms about using to dominate the Asian market of late.
These developments have, in turn, led some senior oil people – usually a tight-lipped bunch – to go public with their concerns.
In today’s Business section, Dave Ensberger, the global head of oil content at Platts, which plays a key role in setting official Asian oil market prices, makes the case for the current unregulated over-the-counter system.
This is in answer to increasingly vocal concerns by market players, the highest profile of which was Mike Muller, head of global oil trading at Shell, who in an interview with the Financial Times in December said that China’s blatant domination of regional oil trading was a reflection of a lack of regulation in the Asian market compared to the US and Europe. He argued for a move to a regulated market, specifically using the Dubai Mercantile Exchange’s (DME) Oman futures contract, as the regional benchmark.
On the face of, it may seem a turgid discussion of the technical workings of a complex market. But the underlying concept is quite simple and very important – oil traders report what cargoes of oil they have agreed to buy and at what price, and Platts publishes those prices which oil companies use for almost all of their contracts in Asia.
That gives those prices sway over billions of dollars worth of oil – the Middle East physical crude going to Asia alone accounts for about US$15 billion each month, even at today’s much reduced prices. There is also an opaque derivatives market that rests on those prices.
As Tony Nunan, oil risk manager at Japan’s Mitsubishi trading house, explains: “Platt’s dominates Asian crude oil and petroleum products benchmarks, such as Oman, Dubai, [Singapore] gasoil, kerosene, 180 and 380 fuel oil, and [Japan] naphtha, making it virtually impossible for market participants to avoid the use of these benchmarks in their normal trading and hedging.”
Platts, as it has made clear on many occasions, is only a collector and publisher of prices and has no role in policing the market, although as Mr Ensberger makes clear, it takes a keen interest in collecting those prices in such a manner that the market continues to use them.
It would be easy to dismiss aspects of the debate as the gripes of competing commercial interests.
For example, Shell’s trading influence has diminished in Asia as that of the Chinese companies has grown.
Platts is a profitable division of McGraw-Hill Financial – its unit accounted for about one-third of the company’s US$2.4 billion revenue in the first nine months of last year – especially in Asia. Its competitors would like to eat into its business, and that includes the DME, which stands to gain substantially from a switch to its futures contract for benchmark pricing.
The bigger question, though, is about regulated versus unregulated markets – a question that has been a growing concern for all those who rely on financial markets in the wake of the crash.
The irony of Mr Muller from Shell calling for a move to a more regulated market in Asia was not lost on many people in the market. Traditionally, oil market players have been happy with light regulation when it suits them – and Shell has been pushing back against tighter European Union regulations of oil trading. (Shell says it is complex).
There is no doubt, though, that the momentum is towards more regulation for markets.
McGraw-Hill Financial itself identifies as one of the risks for its businesses, including Platts, “the rapidly evolving regulatory environment, in the United States and abroad.”
Its main subsidiary, Standard & Poor’s, was fined a record amount last year for its role in the US mortgage crisis.
In the Asian oil market, the key players are the Arabian Gulf’s national oil companies. They have been more vocal recently about their dissatisfaction with the current system. The key decision they must make is whether it is in their long-term interest to support a regulated market in Asia or stick with the current system.