British Brent oil trading founders

Press, 20 February 1986, Page 26

British Brent oil trading founders

NZPA-Reuter London Trading on the highlyspeculative spot market in Britain’s Brent crude oil has ground to a halt amid allegations of fraud and bad faith, putting the once blooming market’s survival in doubt, industry sources say. The crisis has been triggered by the shock of last month’s plunge in world oil prices. A series of crucial meetings is being held in London this week aimed at solving the crisis without resort to the law courts, but, already, threats of legal action are flying, along with recriminations about who is responsible for a string of recent defaults, as traders tried to back out of deals on which they would lose many millions of dollars. "The market is totally stalled. No one trusts anyone any more,” said one trader. In a business without written rules, trust between trading partners had been been vital to the market’s existence, brokers and traders say?

The multi-billion-dollar spot market in crude oil has mushroomed in the last few years as the oil shortage of the early 1980 s gradually turned into a glut. The change persuaded oil companies to abandon long-term contracts, which offered secure supplies but at high prices, in favour of much cheaper cargoes on the spot market.

Brent crude became the focus of speculative business, and specialised traders were joined by the

oil multinationals, Japanese trading houses and New York investment firms. As turnover grew, Brent became a de facto futures market. Trading would start several months before a cargo was due to be loaded, and the cargo could change hands well over 100 times before the ship was actually filled with oil. These huge, linked lines, known as daisy chains, lie behind the present crisis, and point to the shortcomings of the Brent market. If just one company defaults, this could jeopardize all the transactions before and after in the chain. Gatoil, a trading company which also owns a refinery in Switzerland, suspected that it had been given false nominations for cargoes of Brent loading at the Sullom Voe terminal in Scotland.

A Gatoil spokesman in Geneva declined to comment. However, the sources said Gatoil had bought seven cargoes In advance with flexible loading dates but became suspicious when notification was received that all seven shiploads would load on the last three days of this month. Such a target would be almost impossible to achieve. A spokesman for British Petroleum, which operates Sullom Voe, said only 11 Brent cargoes loaded during the whole of last week. Weather conditions had been exceptionally good and the terminal had not shut once, which was unusual during the stormy

winter. Gatoil had accepted two cargo nominations from reputable companies with stakes in North Sea oil fields, but said three or four of the others were false, the sources said. Gatoil had not started legal action because the loading dates had not yet arrived, leaving leeway for negotiation. However, the market has been thrown into chaos by the knock-on effect of Gatoil’s rejection of the nominations. Many firms are threatening legal action against others in the chains for defaulting on deals, some struck many weeks ago.

Where the false nominations came from remains unclear, but industry sources said a firm might have supplied such a nomination to back out of a deal on which it was going to lose heavily. Trading in Brent cargoes loading in February started last September at about 26 dollars a barrel. By November prices had hit 29 dollars, but the whole market crashed last month and cargoes would fetch little more than SUSI 7, were any deals being struck. Traders who incorrectly forecast these wild fluctuations faced losses of several million dollars on each transaction, enough to put some firms out of business.

Talks on solving the crisis have already started in London, as oil traders from all over the world gather for this week’s annual Institute of Petroleum dinner and satellite social events.