August 6, 2021

Inquiry on Potential Oil Price Manipulation Intensifies in Europe

“It is too coincidental that companies’ prices all go up the same and all come down very, very slowly,” said Mr. Fry, who buys large amounts of fuel for his company, Framptons Transport Services.

European authorities are also worried about the forces behind the market.

On Wednesday, the European Commission ramped up its inquiry into the potential manipulation of oil and biofuel prices, as investigators continued to question BP, Royal Dutch Shell and Statoil about their trading activities, according to people with knowledge of the meetings. Regulators, in part, are focused on a pricing system operated by Platts, a unit of the McGraw-Hill Companies.

BP and Royal Dutch Shell said they were cooperating with the investigation. Statoil did not return calls for comment.

Authorities face a daunting task. Oil is one of the murkiest markets. Much of the vast global oil trade occurs away from regulated financial exchanges, as companies and traders buy and sell billions of dollars of crude oil each day and ship it around the world.

Agencies like Platts and privately held Argus Media have carved out a niche tracking those transactions and developing benchmarks for pricing oil. The agencies establish prices by phoning and messaging traders. Platts supplements that information by tallying up the bids and offers submitted to an internal trading system.

Their influence is extensive. Total, the French oil giant, estimated last year that 75 to 80 percent of crude oil and refined product transactions were linked to the prices published by such agencies.

Consumers and companies are heavily reliant on the market, which affects a range of things, from the price at the pump to the cost of an airline ticket to supermarket bills.

A refinery, which turns crude oil into products like gasoline and diesel, might use a Platts price as a reference for the crude oil it buys to run through its system. The refinery then turns the oil into gasoline, which is sold to consumers and companies.

Mr. Fry’s company buys 36,000 liters of diesel fuel every eight to 10 days either from a big company like BP or a wholesaler. It is the biggest expense, accounting for 35 to 40 percent of the company’s costs. When a trucking company goes out of business, fuel prices are usually “the reason they had to close doors,” said Mr. Fry, who is also chairman of the Road Haulage Association, an industry group in Britain.

Authorities are worried that oil companies may be distorting prices.

The European inquiry comes as regulators broadly look into whether traders and others are manipulating a variety of markets. Over the last year, several big banks have faced multibillion-dollar fines for their role in rigging a critical benchmark known as the London interbank offered rate, or Libor.

“Regulatory scrutiny of all price-setting mechanisms has probably increased as a result of the Libor scandal, especially when some see processes like energy price reporting as subjective and prone to manipulation,” said Roderick Bruce, an analyst at IHS, a market research firm in London.

Platts operates in an unusual way, by relying on an internal trading system to help determine prices. Market participants, like oil companies, financial institutions, and airlines, submit bids and offers and reports of transactions. During the last 30 to 45 minutes of the day, those submissions come at a frenzied pace.

The big question is whether the system can be manipulated.

Critics contend that the number of trades through the Platts system can be sufficiently low, allowing for potential manipulation. As a result, they say that oil companies could have an impact on prices by submitting low or high bids, especially at the end of the day.

The “process has faced criticism because it concentrates price discovery in a small assessment time window, perhaps making it more prone to potential manipulation,” Mr. Bruce said.

Platts defends its process, saying it strictly controls the window process to avoid “dramatic and sudden price movements.” Editors, the company added, also have discretion to take into account cargo size and other factors that may affect the markets.

If history is any indication, it may be hard to determine whether companies manipulated the markets.

The International Organization of Securities Commissions, a regulation group, investigated the role of the agencies for two years starting in 2010. In the end, the group settled for a new compliance code, which is largely voluntary.

Last year, the Road Haulage Association tried to persuade Britain’s competition regulator to investigate. But the group said it was told that there was insufficient evidence to support the claim.

“All of our members will be pleased that someone is now looking into the issue,” said Mr. Fry. “We hope it will lead to a fairer price of fuel.”

Claire Barthelemy contributed reporting.

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BP to Return $8 Billion to Investors

The company completed the sale of its stake in the venture, TNK-BP, to Rosneft, the Russian state oil company, on Thursday for $12.48 billion in cash as well a 19.75 percent stake in Rosneft.

The $8 billion is roughly the equivalent of what BP originally paid for its 50 percent of TNK-BP in 2003. Over the last 10 years BP also received $19 billion in dividends from the venture, the company said.

BP said the remaining $4.48 billion from the stake sale would be used to reduce debt.

The buyback is about twice as large as analysts were expecting, said Andrew Whittock, an analyst at Liberum Capital in London, in a research note.

BP shares closed up 1.85 percent in London trading on Friday but remain about 30 percent below their level before the April 2010 Gulf of Mexico oil spill as investors worry about the company’s potential liabilities in the United States.

The company’s chief executive, Robert W. Dudley, who has led BP since October 2010, said in a statement that the buyback was expected to exceed what was required to offset the earnings-per-share dilution as a result of the TNK-BP sale.

He said the buyback also reflected the reduction in BP’s size after its $38 billion in divestments, excluding TNK-BP, over the last three years. BP has been selling assets as part of an effort to raise cash to pay for liabilities resulting from the Deepwater Horizon accident and oil spill in the Gulf of Mexico, which killed 11 people and spewed millions of barrels of crude oil.

At a news conference Thursday at BP’s headquarters in London, the two companies announced that Mr. Dudley would be nominated to join the Rosneft board. BP will also have an additional seat on the board.

Rosneft also bought the remaining 50 percent of TNK-BP on Thursday from a group of Russian oligarchs for $27.7 billion.

An ebullient Igor I. Sechin, Rosneft’s chief executive and an influential government official in Russia, said the two companies were already looking into what projects BP could collaborate on with Rosneft. “We are going to work definitely with BP offshore,” he said. “We are definitely going to avail ourselves of the experience and competencies of BP.”

Mr. Dudley said that Mr. Sechin had gone without sleep for about 40 hours in working to complete the transaction.

He said that the global oil and natural gas industry was changing and that new technologies gave Russia the opportunity to exploit “more expensive” methods to develop resources, like offshore oil, shale gas and tight oil, which is produced using techniques similar to those used to produce shale gas.

Mr. Dudley suggested that he was not troubled by the fact that Rosneft already had important strategic ventures in the Arctic with BP competitors — Exxon Mobil, Statoil and Eni. “We all applaud Rosneft’s progressive approach of strategic ties with international oil companies,” he said.

As a significant minority shareholder in Rosneft, BP will benefit from these ventures, Mr. Sechin said.

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TransCanada in Eminent Domain Fight Over Pipeline

Randy Thompson, a cattle buyer in Nebraska, was informed that if he did not grant pipeline access to 80 of the 400 acres left to him by his mother along the Platte River, “Keystone will use eminent domain to acquire the easement.” Sue Kelso and her large extended family in Oklahoma were sued in the local district court by TransCanada, the pipeline company, after she and her siblings refused to allow the pipeline to cross their pasture.

“Their land agent told us the very first day she met with us, you either take the money or they’re going to condemn the land,” Mrs. Kelso said. By its own count, the company currently has 34 eminent domain actions against landowners in Texas and an additional 22 in South Dakota.

In addition to enraging those along the proposed pipeline’s 1,700-mile path, the tactics have many people questioning whether a foreign company can pressure landowners without a permit from the State Department — the agency charged with determining whether the project is in the “national interest.” A decision is expected by year’s end on the pipeline, which would carry crude oil from Alberta to American refineries.

A government official with knowledge of the permitting process who would address the issue only on condition of anonymity said, “It is presumptuous for the company to take on eminent domain cases before there is any decision made.”

Landowners have begun joining forces and challenging the company’s assumption that it can legally seize land.

“With so many unanswered questions about the safety of this project, perhaps it’s time for the U.S. to hit the brake pedal,” Mr. Thompson wrote in testimony for a House Energy and Commerce Committee hearing in May. “And perhaps it’s time that our government starts placing the concerns of American citizens over and above those of a foreign corporation.”

Mr. Thompson said he intends to fight to keep the pipeline, 36 inches in diameter, off his land. Eminent domain laws generally allow for the confiscation of private property if taking it is judged to serve a larger public good. These kinds of laws differ slightly from state to state as do the processes by which pipelines are approved and licensed. As a result, there is both debate and confusion over whether TransCanada has the right to use the courts to demand easements from property owners in advance of final approval for the project.

A TransCanada spokesman, Shawn Howard, says the company does not have to wait for a license from the State Department to begin securing land. He said the company has tried to obtain voluntary agreements, but when that fails the company has the right to force lease agreements upon landowners in all six states the pipeline would pass through.  All of TransCanada’s permit applications, he said, have been made through its subsidiary in Omaha, Keystone Pipeline.

“We have been given the legal advice that we can do this in parallel to the process going on in Washington,” Mr. Howard said. “If we didn’t think we had the authority or ability to do this, we wouldn’t be doing it.”

A senior State Department official, who asked not to be identified because the permit process is continuing, said TransCanada had not sought federal approval to invoke eminent domain. He said the department had no authority on the issue and that it was up to state law and the courts to determine appropriate use of eminent domain laws.

Landowners and their lawyers are pushing local courts to do just that. While it is impossible to say how many cases are working their way through the legal system, in addition to the 56 Texas and South Dakota cases, TransCanada acknowledges it has sent “Dear Owner” letters to dozens of families in Nebraska.

Timothy Sandefur, a lawyer with the Pacific Legal Foundation, a nonprofit advocate for property rights issues, said that if the project is approved, the company will be on firmer ground. As unfair as the laws might seem, he said, the right of way of pipelines and railroads as public goods has been well established, regardless of whether they are foreign-owned. “Property owners almost never win these suits,” he said.

But lawyers for the landowners, particularly in Nebraska, Oklahoma and Texas, argue that TransCanada has not met the requirements to invoke eminent domain under those states’ laws. In South Dakota, however, a judge has already ruled that TransCanada could use eminent domain to secure land for a previous pipeline project.

David A. Domina, a Nebraska lawyer whose firm represents 45 landowners, said there was “no way” that TransCanada has eminent domain powers under Nebraska law, and that the company was “acting in bad faith.”

In East Texas, where residents are used to having cordial dealings with oil companies, landowners said they had never seen a company behave as aggressively as has TransCanada.

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U.S. Trade Deficit Widens in March on Pricier Oil

The trade deficit rose 6 percent to $48.2 billion, the Commerce Department said Wednesday. That’s the highest level since June 2010 and up from $45.4 billion in February.

Exports increased to $172.7 billion, the most on records dating back to 1993. A weaker dollar has made U.S. goods cheaper overseas. Exports have also risen because of rapid growth in developing countries. U.S. companies exported more autos, chemicals, and agricultural goods in March.

However, oil imports soared to $39.3 billion, an 18 percent rise from the previous month. It was the highest level since August 2008 and reflects steep price increases, as well as greater demand. Excluding oil imports, the deficit narrowed.

The average price for a barrel of imported crude oil was $93.76 in March, up nearly 7.6 percent from February. Oil prices have risen even further since then, despite declines in recent weeks. Oil closed at about $104 per barrel on Tuesday.

The trade deficit is currently running at a $562.8 billion annual pace. That’s above last year’s total of $495.7 billion. Economic growth generally slows when imports outpace exports because more jobs go to foreign workers.

Economists expect the fast rise in exports to boost growth in the April-June quarter, even with high oil prices widening the deficit. That’s because the government adjusts for inflation when calculating the nation’s gross domestic product.

“The details in the report are encouraging for economic momentum,” said Joseph LaVorgna, an economist at Deutsche Bank, in a note to clients. “Strong external demand fueled by a near-record low … dollar is lifting exports, while the rise in imports is evidence of burgeoning domestic demand.”

The trade deficit with China, meanwhile, decreased to $18.1 billion. That’s down slightly from February.

But it is expected to rise in the coming months. On Tuesday, China reported a big increase in its April trade surplus. Its imports fell while exports jumped 30 percent. That’s likely to raise pressure on China to let its currency rise.

The trade gap between the two countries was a top issue in high-level meetings between U.S. and Chinese officials earlier this week, though little progress was made on the currency issue.

The devastating earthquake and tsunami in Japan on March 11 didn’t impact U.S. trade figures. Imports from Japan rose by $1.3 billion and U.S. exports to that country also increased. But disruptions to Japan’s auto production are likely to reduce U.S. imports in coming months, economists say. That could narrow the trade gap.

U.S. companies sold more autos, industrial materials, and food and consumer goods in March. Auto and auto part exports rose to $11.6 billion from just below $10 billion in February.

In addition to oil, imports of computers, autos and auto parts, and aircraft rose in March.

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The Fed’s Statement on Interest Rates

Information received since the Federal Open Market Committee met in March indicates that the economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Commodity prices have risen significantly since last summer, and concerns about global supplies of crude oil have contributed to a further increase in oil prices since the committee met in March. Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued.

Consistent with its statutory mandate, the committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the committee judges to be consistent, over the longer run, with its dual mandate. Increases in the prices of energy and other commodities have pushed up inflation in recent months. The committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. The committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the committee decided today to continue expanding its holdings of securities as announced in November. In particular, the committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and will complete purchases of $600 billion of longer-term Treasury securities by the end of the current quarter. The committee will regularly review the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings as needed to best foster maximum employment and price stability.

The committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

The committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.

Voting for the F.O.M.C. monetary policy action were Ben S. Bernanke, chairman; William C. Dudley, vice chairman; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.

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