B A C K G R O U N D E R

OIL

Platts Oil Pricing and MOC

Methodology Explained
June 2010
BA CKGROUN D E R : Platts Oil Pricing and MOC

WHAT IS PLATTS’ ROLE IN OIL PRICING? The extent of the usage of Platts prices in spot and term
deals, and in derivatives settlements, is very large and a
Platts is a publisher of specialized information on energy multiple of the world’s daily crude oil and refined product
and other commodity markets, and helps those markets output.
function with greater transparency and efficiency.
Platts observes market activity and assesses the value Where the price of physical oil is based on Platts
of commodities based on strict and publicly available assessments, almost invariably the related swaps are also
methodologies. With a century of experience and more priced out against Platts assessments of the underlying
than 250 experienced market editors positioned in locations spot market. This is because of the need for convergence
in North America, Europe, the Middle East and Asia, Platts between the physical market value and the value at which
has earned a reputation as the industry’s most reliable the swap is settled. Without this linkage, a hedger faces
source of pricing benchmarks, market news and analytical basis risk. If a commodity is sold on a basis other than
information. The prices published by Platts are respected Platts prices, the related derivative instrument would
by the market and referenced globally as benchmarks for typically use that basis rather than a Platts assessment.
contract settlement in both physical and financial markets,
including crude oil, refined products, petrochemicals and WHAT IS PLATTS’ ROLE IN RELATION TO THE PRICING OF
related derivatives. CRUDE OIL?
As a publisher owned by The McGraw-Hill Companies, Since the switch to market-related pricing in the mid
Platts conducts its editorial and market assessment 1980s, crude oil pricing has been focused around three
activities with complete independence and impartiality. key benchmark grades: Dubai for oil moving from the
Platts has no financial interest in the price of the Middle East into Asia; North Sea Brent crude oil for a wide
commodities on which it reports. Platts price-assessment swath of oil from Europe or bound for Europe; and West
systems have been developed over many decades, are Texas Intermediate (WTI), for deliveries into and within the
fully open to public view and are overseen by a compliance Americas. Platts’ Dated Brent assessment is believed to
group independent of the editorial staff. Platts takes very be the most widely used international physical oil pricing
seriously its efforts to maintain the integrity of its pricing benchmark. Crude oil produced in Canada, Africa, the
methods and to publish price data that reflect market North Sea, the Middle East, Russia, central Asia and oils
values. delivered to China, Japan and Korea all reference the
Platts Dated Brent assessment. According to industry
HOW ARE PLATTS’ OIL PRICES USED? estimates, Platts’ Dated Brent assessment is used to price
up to 70% of the crude oil produced worldwide.
Platts daily spot price assessments are used in a variety
of ways: (1) for the settlement of floating price deals; (2) Platts recognizes the important role it plays in the
under long-term contracts; (3) on a spot basis; (4) for the marketplace and has continued to evolve and fine-tune
settlement of derivatives contracts such as swaps; and (5) its assessment methodologies to reflect changes in
by futures exchanges. Platts assessments also are used the marketplace. Over the years, Platts has made well
to monitor trader performance, to quantify financially the publicized changes to its assessment methodologies
value of oils transferred from the upstream production for the key global benchmark crudes, including allowing
departments to the refinery side of the business and then alternative delivery of other crudes as production volumes
for the transfer to the traders supplying the marketplace. of the core benchmarks have declined. For instance, Platts
The assessments also are used in decision-making by in 2001 introduced Oman and in 2006 added Upper Zakum
refiners, for instance in deciding whether to maximize jet as alternative delivery grades for Dubai. Separately, in
fuel production or to minimize diesel fuel, or whether to 2002 Platts broadened its definition of Brent crude oil to
shut down a refinery altogether. include Forties and Oseberg as alternative delivery grades,
and Ekofisk was added in 2007. The need for alternative
Platts assessments also are used in long-term financing delivery grades resulted from declining production of the
deals to provide the basis to determine profitability and core benchmark grades.
cost in multi-year projects, including drilling and pipeline
projects.

2 | Platts Oil Pricing and MOC Methodology Explained

Platts aims for its methodologies to reflect changes in MOC is a time-tested method for deriving price
fundamentals such as crude production or regulatory benchmarks that reflect market value and Platts has
changes governing product qualities. Its methodologies at provided these benchmarks to global oil markets across
times are emulated or adopted by other publishers, with Asia, Europe, the Middle East and Africa for more than a
recent examples being adoption of “window” processes decade.
in Europe by other publishers and adoption of Platts’ wider
definition of Dated Brent by at least one competitor on the The MOC pricing system recognizes as a core principle
exact date of launch announced by Platts. that price is a function of time and MOC enables Platts
to have full clarity on the price at the close of business.
In the Americas, Platts’ physical crude oil assessments Because price is a function of time, market assessments
are still widely used by the industry, but the “flat” price reflect values at a defined point in time, allowing both
formation is originated by the New York Mercantile outright and spread values to be properly reflected.
Exchange (NYMEX). The highly liquid sweet crude futures
contract traded on NYMEX provides a visible real-time MOC guidelines are designed to avoid distortion of the final
reference price for the market. In the spot market, assessments by eliminating inputs that are not verifiable,
therefore, negotiations for physical oils will typically use and by disregarding one-offs or unrepeatable transactions,
NYMEX as a reference point, with bids/offers and deals or those that may distort the true market level. Transactions
expressed as a differential to the futures price. Using these between related parties are, for instance, not considered in
differentials, Platts makes daily and in some cases intra- the assessment process. Secondary checks are carried out
day assessments of the price for various physical grades of occasionally, in which Platts will request documentation
crude oil, which may be referenced in other spot, term or for deals done, which may include contract documentation,
derivatives deals. and other supporting materials such as loading and
inspection documents; if this is not forthcoming, it raises
For example, Platts’ American benchmarks are in turn questions about that company’s reliability as a data
used to price crude oils from Canada and South America, source, and can result in Platts disregarding that data. The
although some are also based on Dated Brent. The multi- reliability of data is essential to any valid market pricing
faceted complexities of the physical market result in a methodology and Platts does not hesitate to remove market
diversity of pricing mechanisms, as individual buyers and participants from the MOC price formation process when
sellers are free to make decisions about the mechanisms the veracity of data is in doubt.
they individually employ. Therefore, while NYMEX acts as a
barometer of market value, and negotiations for physical oil MOC maintains a robust and structured system that
may reference the futures value, Platts plays a distinct and uses only data that Platts editors deem reliable in the
complementary role to that of the exchange. assessment process. Rather than taking price information
on trust, Platts will consider companies’ information only if
the bids and offers are made public, and in real time with
WHAT IS THE PLATTS MARKET-ON-CLOSE (MOC) full transparency. Companies are named and all the details
ASSESSMENT PROCESS? of their positions are fully available to the view of the entire
Platts’ Market on Close (MOC) is a price-discovery system market. The bids are firm and open to the market at large.
designed to yield a price assessment reflective of market Market participants are expected to perform on any stated
values at the close of the typical trading day. Systems of position in the MOC process. Time cut-offs for the entry of
similar nature are very common, with variants seen in the new bids and offers are applied so that market participants
futures markets where the energy and financial exchanges cannot bid or offer late in the process in a way that
publish daily settlement prices reflective of activity at the would not be logistically executable. There are also strict
close of markets. The MOC process is a very structured standards defining the increment levels for each bid or
system for information gathering that allows transparent offer to ensure orderly price formation, to avoid a scenario
and fully verifiable market information to form the basis of in which a market might be “gapped” higher or lower.
the daily price assessment. This system works well across markets, whether they are
liquid or illiquid, whether they are commoditized or non-
commoditized.

Platts Oil Pricing and MOC Methodology Explained | 3

BA CKGROUN D E R : Platts Oil Pricing and MOC

HOW DOES MOC ACTUALLY WORK IN REAL LIFE? • I t is important to note that Platts has very strict
systems and disregards market gapping activity in its
The MOC process is designed so that the published price assessments If, for instance, a market participant were
reflects the market value. Below is a sample of how this to want to overpay or undersell, by lifting high and
process works: unreasonable offers or selling into low and unreasonable
• I n a real-life example, a gasoline seller might believe the bids, such activity would be disregarded. In these cases,
market value of gasoline to be high and a buyer might the transactions would be ignored and the assessment
believe it to be low. Let’s call the seller X and the buyer Y. would take into account the last relevant bid and offer,
with an editorial assessment made of value, but the last
• Platts seeks to gauge the true value of gasoline. trade would not be considered to be of value.

• I n the MOC process, X might offer to sell at 154.25 cents

per gallon (cts/gal) and Y might bid to buy at 152.75 cts/ WHAT IS THE PLATTS “WINDOW”?
gal. In the oil market, Platts takes into account market
• X
 and Y communicate their bids/offers to a Platts information gathered throughout the normal trading
market editor. Communication may be via an instant day. Platts considers in its assessment process market
message to a Platts market reporter, who inputs the information including bids, offers and transactions. Bids
information internally, or via Platts’ electronic eWindow and offers must be submitted early, ranging from 10 to
communication tool enabling market participants to 60 minutes prior to the close, to ensure that the bids and
input data directly. In either instance, the information is offers are widely seen and are properly analyzed for
delivered back to the market at large in real time through logistical and performance issues. Last-minute bids/offers
the Platts Global Alert electronic service. that cannot be logistically executed are excluded from the
assessment process. The period when new bids and offers
• P
 latts at this stage can assess market value between are no longer accepted is what the industry calls the Platts
152.75 and 154.25 cts/gal. window.

• X
 and Y can change the price at which they are bidding Some observers think erroneously that Platts only
and offering by small reasonable increments, and each of assesses the market in the “window.” Some also think
these price changes is published on the real-time screen that Platts only processes new bids and offers in the
as a price alert headline. window. In fact, the opposite is the case. The “window”
represents the period of time when new bids and offers
• As offers and bids become sharper, as in any negotiation, are no longer accepted in the assessment process. Bids,
the strength of each party will determine who acts offers and transactions may be reported at any time and
first, both knowing that other market participants could are reported before the window. The “window” is just a
intervene with a bid or an offer. part of the larger “assessment process” that Platts uses to
track markets through the day. Platts surveys the market
• X
 may gradually move its offer down to 153.00 cts/gal
throughout the trading day, including during the last half
while Y does not budge, and X may eventually sell at
hour of trading activity, to arrive at its price assessment.
152.75 cts/gal.
Full details of the editorial processes relating to Platts
• T his process gives a very detailed information trail to Market on Close assessment are available on the Platts
Platts, and the assessment derived from it is not an website, www.platts.com.
opinion that X is right or that Y is right, but a reflection of
Platts time stamps the assessment because prices and
the fact that either party would be expected to complete
the value relationships among commodities change
a transaction if its counterparty or another market
constantly with time. If Platts were to assess different
participant met a bid or an offer.
commodities at different points in the day, the result would
• It is possible that both parties may not trade at all but be skewed relationships between commodities. This is
only remain bidding 152.75 cts/gal and offering at 153.00 also the problem with trade-weighted averages, as these
cts/gal, in which case the assessment will consider can be skewed if trade in different commodities is spread
the bid and offer in its assessment process and an unevenly over the day. This results in erroneous data such
assessment will be made based on the factual market as inverted product values, incorrect product-to-crude
data. spreads and staleprice arbitrage.

4 | Platts Oil Pricing and MOC Methodology Explained

If time factors are not evaluated properly, the actual price by technical “optionalities” in the contractual terms
relationship between commodities may be distorted by and/or by non-apparent restrictions. Platts is able to
publishing old and new prices side by side. The MOC observe direct market activity or the effect of commonly
process enables Platts and its subscribers to properly traded commodities on illiquid commodities via spread
see the ranking of one commodity relative to another by differentials or via blending and shipping economics.
aligning prices at a specified point in time.
Platts has editorial protocols that filter out bids or offers
that could result in price obscurity or illogical market
DOES PLATTS SET REQUIREMENTS FOR PARTICIPATION behavior. The rules of incrementability and repeatability
IN THE MOC WINDOW PROCESS? allow evaluation of whether bids/offers are typical and
Market inputs from reputable companies with solid repeatable market values, or outliers designed to mask or
performance records and the proven ability to handle obfuscate the market level.
logistics are recognized as valid entries for the MOC Some market participants have asserted that MOC does
assessment process. Submission of trading positions can not work well in highly liquid markets because there is
take place via phone, squawk box, instant messenger too much data, or that MOC does not work well in illiquid
services such as Yahoo IM, or Platts’ eWindow markets because there is not enough data. Platts believes
communications tool. All trading positions are firm and that having more rather than less market data is positive,
fully executable between non-affiliated counterparties, and MOC has the added benefit of tending to concentrate
unless a bid or offer is withdrawn prior to being challenged liquidity into time frames at the close of the day. Markets in
by another principal. The progression of market activity general naturally tend toward concentration mechanisms
can be viewed by customers of Platts Global Alert via such as malls or market days or times of day to ensure that
transaction-monitoring pages such as PGA003, PGA005 buyers and sellers can easily meet. MOC or windows are
and PGA190. At the end of trading activity, Platts’ market the modern-day equivalent of market days in an agrarian
editors analyze the information gathered to derive a time- society. Sophisticated financial markets, including energy
specific assessment of market value. These assessments exchanges, also concentrate activity around the time of
are delivered back to the market in a variety of Platts settlement. Some exchanges have settlement systems
products. where they employ the equivalent of window processes
lasting generally from one minute to 30 minutes.
DOES THE MARKET-ON-CLOSE METHOD WORK IN
ILLIQUID MARKETS? PLATTS’ PRICING METHODS ARE SOMETIMES CRITICIZED
The Platts MOC system works well across markets, BY INDUSTRY PARTICIPANTS. WHY?
whether they are liquid or illiquid, whether they are Platts has pioneered transparent price-reporting standards
commoditized or non-commoditized. In complex physical in commodities markets around the world, at times with the
markets such as oil, Platts aligns the divergent and support of the industry and at other times without industry
segmented market dimensions to those defined in the support. In the global oil markets, Platts has long held the
Platts assessment. This process is called normalization. view that a transparent and time-sensitive assessment
Specification parameters are defined in Platts’ process yields the most reliable results. Transparent
specification guides, editorial guideline documents and disclosure of market information to support the robustness
subscriber notes, which are published on www.platts.com of a market assessment is not always welcomed. However,
and in the individual Platts publications. Platts’ leadership in markets is not about relying on
Physical markets are extremely complex and require an consensus but rather about committing to publish the best
in-depth understanding of logistics, shipping, pipeline result.
schedules, trade financing, payment processes, blending The transparency that Platts brings to markets reflects
economics and all the support required before and after how seriously it takes its role as a publisher of price
the trade. Platts excels in this area and its editors are assessments. Transparency does not just happen; it is the
routinely asked to provide seminars on pricing issues. product of structured and analytical processes. Typically,
A transaction or the price seen in a transaction needs companies recognize that transparency is in their long-
to be carefully evaluated to understand its relevance, term interest, even if in the short term there are groups of
as prices are affected by qualities, volumes, location, companies, and traders, who resist it.

Platts Oil Pricing and MOC Methodology Explained | 5

BA CKGROUN D E R : Platts Oil Pricing and MOC

Platts is not alone in providing information and this window time period, as well as market activity that
transparency to markets. Large news agencies as well takes place over the entire trading day. A key weakness in
as specialist price reporting services exist that compete all tradeweighted average assessments is that they will lag
with Platts in delivering timely and high-quality market the market price. They always reflect a price that “was”
information to subscribers. Brokers also play a role in rather than the price that “is.” To use an analogy, a person
disseminating such information as they bring buyers and purchasing shares of stock would be very unhappy with
sellers together, although brokers rely on deal commissions an information provider who could only supply the price
for revenue rather than subscriptions. These competitors that was or the average price traded rather than the actual
also provide price assessments. price of the shares.
Alternative oil pricing methodologies range from reflecting
an informed opinion of market value, to approaches such DOES THE LAST BID, OFFER OR TRANSACTION
as reflecting the range of deals over a day, the average REPRESENT THE ASSESSMENT?
of deals over a day, the bid/offer spread at the close of The assessment under an MOC process is the
business, or the last deal done. All these methodologies, representative market value prevailing at the close of the
some of which have been tried by Platts in the past, market. The system is highly structured with price editors
have weaknesses. Averages and high-low ranges can monitoring all market activity and publishing only those
be distorted by outlier deals, a bid/offer spread can be bids and offers that are representative and in line with
distorted by market participants withdrawing to the side market practices and published guidelines. In a market, the
of the ring, last deal done can be impacted by gapping value is determined by the activity of market participants
and is vulnerable to stale-price arbitrage, and an informed via a bidding and offering process where the bid and the
opinion lacking a clearly stated methodology is simply too offer narrow and eventually converge. Hence the published
subjective to qualify as a valid approach to pricing. market assessment is in the space between the bid and
the offer, but careful monitoring of market processes
HOW DIFFERENT IS AN ALL-DAY TRADE-WEIGHTED will determine exactly where in the space. Last-minute
ASSESSMENT FROM A PLATTS MOC ASSESSMENT? transactions, whether they are acts of market gapping or
occur when traders hit or lift bids/offers without narrowing
An MOC assessment is based on the fundamental principle the bid/offer range, are routinely excluded from the
that price is a function of time. This principle is critical in assessment process.
today’s markets where intra-day volatility may be high. In
the crude oil and refined product markets, for example,
prices can and do change by in excess of $1.00/barrel HOW DOES PLATTS MAINTAIN THE INTEGRITY OF THE
in a matter of minutes. By aligning prices for individual MOC PROCESS?
commodities at the market close, Platts’ assessments Platts’ only currency is the quality of the information it
reflect their outright value as well as the price relationships publishes and it spares no effort in designing and applying
between commodities. rigorous procedures for participation by market principals
A trade-weighted average assessment may result in an in price formation. Platts makes every effort to detect
index that is out of step and not reflective of the actual anomalous market behaviors and act swiftly to ensure
market price prevailing at the close of the day. This would these do not undermine the integrity of its assessments. As
especially be the case on days with high volatility. Trade- a responsible publisher, Platts will only publish information
weighted averages may also be distorted by the pattern it believes to be reflective of the market. Platts maintains
of trading liquidity over the day. To appropriately reflect and exercises the right to exclude companies from the
end-of-day prices, Platts MOC assessments take place in price assessment process when they do not adhere to
a “window” period of time toward the end of each trading Platts’ editorial protocols and guidelines laid out in Platts’
day. These assessments incorporate data gathered during price assessment methodologies.

6 | Platts Oil Pricing and MOC Methodology Explained

HOW DOES PLATTS COMMUNICATE ASSESSMENT WHERE CAN I FIND ADDITIONAL INFORMATION ON THE
METHODOLOGY MODIFICATIONS? APPROACH PLATTS USES IN ASSESSING OIL PRICES?
Platts continually engages in constructive dialogue with http://www.platts.com/Oil/Resources/
market participants as it develops its price assessment
methodologies and adapts them to changing market http://www.platts.com/Oil/Resources/Methodology%20
dynamics. Platts consults extensively with the industry in &%20Spec
open methodology forums around the world, as well as ifications/index.xml
through one-on-one discussions with senior executives at
energy companies, traders, brokers, governmental bodies http://www.platts.com/Oil/Resources/Market%20Issues/
and financial institutions. The forums are open to industry
participants, competing information publishers, regulators, http://www.platts.com/Oil/Resources/Market%20Issues/
exchanges and anyone who has an interest in the price of usgd_QA_
energy.
102406.pdf?S=n
The methodology proposals are also published in
http://www.platts.com/Oil/Resources/Presentations/
the various channels of information, such as printed
publications, that Platts delivers to its customers.
Methodologies are published and downloadable on
Platts’ website, www.platts.com. Platts also issue notes
to subscribers on methodology changes through the
website, the Platts Global Alert electronic service and
print publications. Platts welcomes feedback on its
price assessment methodologies, which it continually
monitors and evaluates with the goal of publishing price
assessments that are of the highest value to Platts
subscribers and the markets it serves.

Platts Oil Pricing and MOC Methodology Explained | 7

 About Platts
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