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Price Discovery Process

Price Discovery Process. Miami, Florida October 29, 2008 Esa Ramasamy Director – Americas Oil Market Reporting. Agenda. Introduction to Platts Types of Price Discovery Process Elements of Price Discovery Platts Price Discovery Process Market on Close - explanation.

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Price Discovery Process

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  1. Price Discovery Process Miami, Florida October 29, 2008 Esa Ramasamy Director – Americas Oil Market Reporting

  2. Agenda • Introduction to Platts • Types of Price Discovery Process • Elements of Price Discovery • Platts Price Discovery Process • Market on Close - explanation

  3. Introduction to Platts • The McGraw-Hill Companies

  4. Moscow London Bonn Paris Guangzhou Hong Kong Washington Dubai Singapore Buenos Aires Sydney Platts Global Reach Calgary Beijing Boston Boulder New York Tokyo Houston Mexico City

  5. Platts’ History • Reporting on energy markets for more than 100 years • Publishing oil assessments since 1923 • Publishing benchmarks since 1928 • A detailed history of Platts can be viewed at: • http://www.platts.com/About%20Platts/history.html

  6. Platts’ Prices, Analysis & News Market Analysis Price Assessments & Indices Market Reports Real-time Market news

  7. Definition of spot price assessment “The closing range in which a standard repeatable transaction takes place or could take place at arm’s length.”

  8. Types of price discovery processes • Whole day average • Weighted average (whole day and time specific) • Market on close

  9. Elements of Price Discovery • Integrity • Transparency • Accountability • Availability of explicit bid/offer to market at large • Trades done are at arms length • Follow through of transactions • Reflects market activity

  10. Platts Price Discovery Process • Why did Platts adopt a market on close approach: • Integrity – not tainted by subjective inputs • Objectivity – interpretation of market events minimized • Transparency – open for all to view – everything is explicit • Clarity of assessment – assessment can be explained factually and retraced • Alignment of spreads • Price is a function of time

  11. Platts Price Discovery Process • Use of real-time technology to interact with market • Platts only uses information from credible sources • Market typically defines creditworthy counterparties • Assessments are based on ‘market-on-close’ principle • Assessments reflect transactable values at 3:15 pm New York local time

  12. Platts Price Discovery Process Trades, bids and offers at the close (3.15 pm New York time) are taken into account for the assessment process In the absence of trades, the most competitive bids and offers at the close will provide a floor and a ceiling to the assessment after any necessary normalization. The assessment would be within the bid-offer range.

  13. Platts assessments • Only information that meets Platts guidelines will be used for assessment purposes • All information received post 3.15pm ET may not be included in the assessment process • Assessments account for backwardation & contango • Assessments are “normalized” to Platts methodology • Trades done on a fixed and/or floating prices would be included in the assessment process. • Both fixed and floating prices carry equal weight • All principals must be at hand to confirm their trades

  14. Price discovery – Market on close Offers Deals Bids Cut-off for new bids/offers 3.15 pm NY assessment

  15. Platts’ Assessment Guidelines • Any credible market participant can contribute to the assessment process • All bids/offers must reflect standard market practices, close to where the market is trading, be explicit and be ready to be transact • All contributors must be contactable at all times during the assessment window • Bid/offers via brokers are accepted but principals need to inform Platts directly on who is representing them. • All information used in assessment process will be published with details.

  16. Platts’ Americas Time Line • Platts tracks market developments from 9.00 am New York local time and up to 3.15 pm New York local time. • 9.00 am ET – Bid/offer, trades published in PGA 400 • 10.00 am – 2.00 pm ET: Intra-day indications are published • 2:30 pm ET: Acceptance of physical cargo bids/offers • 2:45 pm ET: Acceptance of new barge/pipeline bids/offers • 3.00 pm ET: Acceptance of derivatives/swaps bids/offers • 3:13 pm ET: Final changes to bid/offers • 3:15 pm ET: Market-On-Close. All bid/offers expire • Information provided to Platts past 3.15 pm New York time would be reported in the commentary but would not be used in the assessment process.

  17. Communications • Platts accepts any reasonable method of delivery/communication for bids, offers and transactions, as early as 9.00 am New York local time • Platts editors typically communicate with market players by phone or via on-line instant messaging systems • Platts tries to accommodate the communication needs of market participants and will endeavor to open any additional communication channels required

  18. Sample of Communications tool – PGA 400 • Americas 160: USGC: 3%S: Sempra wants to buy BP bid • 03Nov06/ 309 pm EST/2009 GMT • 2009 GMT: USGC: 3%S: Sempra wants to buy BP bid • 2008 GMT: USGC: 1%S: Conoco heard bid $43.45/bbl FOB Marrero, Nov 10-12, FP&L Manatee spec (visc 75/225), 40kb. • 2008 GMT: USGC: 3%S: BP bids $39.25/bbl FOB Hofti, Nov 13-15, 3%S Platts spec, 40-45kb. • 2007 GMT: USGC: C63 54: talked Dec +0.5/+1.75 cts/gal • 2007 GMT: USAC: 0.3%HP Morgan Stanley bids $48.50 Con-ed spec Nov 10-15 basis NYH 100mb+/- 10% • 2007 GMT: USGC: 3%S: BP bids $39.20/bbl FOB Hofti, Nov 13-15, 3%S Platts spec, 40-45kb. • 2005 GMT: USGC: 3%S: Sempra bids $39.10/bbl FOB Hofti, Nov 12-14, 50kb+/-5% buyer's option, Platts 3%S spec. • 2005 GMT: Chicago: C1 87-unl: 25kb traded Dec+11.50 cts/g

  19. Prices discovery - Guiding concepts • Incrementability • Bid/offer must change in small steps – ie – 25 points per minute change for cents/gal and 25 cents/barrel for $/barrel assessment • The particulars of a bid and offer (volume, timing, specifications) can be altered at any point before the market cut-offs. • Bids/offers can be withdrawn at any time provided no interest has been made • “Gapping” • Discouraged, and not used for assessment • Market makers should bid, offer at reasonable levels • Trades done by “gapping” would not be used for assessment purposes

  20. Price discovery - Guiding concepts . . . • Buying-Selling • Any credible party in the market can buy or sell to published bid or offer—even if they have not reported their bid or offer to Platts’. First to inform Platts gets to be first in queue for the respective bid or offer. • All expression of interests will be posted on PGA 400. • Players posting bids/offers on Platts assessment window must sell or buy from the first in queue as reported on PGA 400. • Repeatability • After a deal, a market maker’s intention to bid on/offer over must be communicated immediately. • The assessment window will extended for up to 3 minutes to test bid-on/offer-over if received in the last minute.

  21. Gapping explained Since Platts tracks the market throughout the day beginning as early as 9.00 New York time, any bids and offers off market level will not be published and not used during the assessment process: Example:Gasoline barges trade at +2 cents/gal in the morning and all the way up to +4 cents/gal prior to MOC • The trader wants to bid at +6 cents/gal and says the market is really tight and that he can’t find product • The bid will not be accepted at +6 cents/gal, unless the market fundamentals have changed between the last trade and the submission of the bid – eg, outage of a refinery, pipeline etc.

  22. Gapping . . . From the previous example, assume that the +6 bid trades straight away or very close to being submitted in the assessment process and is then no longer bid. We have no other offers or bids. From an assessment point of view, we know the market was strengthening all day and traded up to +4 cents/gal, BUT what we don’t know here is -- would there have been a seller at +4.25 cents/gal, or maybe +4.5 cents/gal, +4.75 cents/gal, +5 cents/gal……and so on We cannot accept the bid as the level between 4 and 6 cents/gal has not been tested and the jump is not justified by any market fundamentals

  23. Gapping . . . • If the fundamentals of the market has changed since the +4 cents/gal trader – a buyer can begin bidding from +4 cents/gal. • This bid can be increased sequentially (25 points per minute in this case) to a level that would attract selling interest. • The same concept applies to offers

  24. Role of brokers • Brokers can contribute a bid/offer on the Platts’ assessment process for a principle. • Principles must confirm their brokers representation to Platts • All communications from this broker to Platts will be deemed as being between the principle and Platts. • Platts is not a broker – PGA 400 is a communication tool used to disseminate information to the market place so that the information provided to Platts can be tested in the market place.

  25. Trading scenarios Scenario 1: You receive direct interest to trade from a counterparty. Scenario 2: A broker communicates to you directly that he has a seller. In the above scenarios, you must inform Platts that you have a seller and that you either withdraw your bid or re-bid. Re-bids are required in a timely manner, within one minute of you concluding the deal and can only be at the same level of the trade or can be lower, higher if it’s a re-offer . They cannot be bid above the trade or offered below. Your bid will continue to be live on screen and available until Platts is notified otherwise.

  26. Trading scenarios . . . Scenario 3: Platts informs you via yahoo or you see on PGA 400 that there is interest in your bid or offer. Scenario 4: An offer matches your bid or offer on PGA 400. In the above scenarios you conclude the trade and inform Platts of any re-bid or re-offer. If a re-bid/offer is not received within a timely manner then we will assume there is not one. In scenario 4 – counter-party’s bid or offer need to have access to PGA 400. Platts will try and pass on information via other communication methods, but during busy periods this may not be possible.

  27. Market maker vs market taker You do not have to submit a bid/offer to trade within the Platts’ assessment process. If you submit a bid/offer, and it was received by Platts in full by the respective deadline. You are a market maker and can increase the bid/lower the offer. If you did not submit a bid or offer, you can lift bids/offers, re-bids/re-offers, but your re-offer or re-bid will not be posted onto PGA 400. There is no limitation on how many times you may trade. (You are a market taker, i.e. your changes to bids/offers will not be posted on PGA 400 and will not be considered for the assessment). Only the market takers interest to buy or sell to a market maker’s bid or offer is posted on PGA 400.

  28. Non-performance All bids and offers placed on the Platts assessment process are deemed firm and hence can be traded when a buyer or seller emerges. If the market maker fails to perform on their bid or offer – this is viewed by Platts as not being able to perform on what was told to Platts. In the event of non-performance, Platts will consider all information provided by the company concerned as being non-credible and hence will not be used for assessment purposes. Platts will highlight and raise this issue to the concerned company’s management and at times even write a story. The loss of credibility could affect a particular segment/region Performance standards extend through execution of the deal (i.e. lifting/delivery of the oil)

  29. Non-performance . . . • At times, companies would require counter parties to open “Letters of Credit” as the credit line has reached its limit. Platts would accept such restrictions provided such information is officially provided to Platts and before a bid or offer is placed on the assessment window. • Market players must notifiy Platts ahead of time if they require LCs from a or more than one company. • In cases where two companies are having a legal issue and hence are not trading both within and outside of the window.

  30. Price discovery - normalization • Platts endeavors to use all of the information received in its price discovery process. At times, these information may not be within the Platts Guidelines and hence would need to be “normalized” to the Platts standards. Bids/offers and deals are normalized to the Platts standard specification, location, and volume for any specific commodity. This provides consistency and allows Platts to accurately publish the value of each commodity. Bids or offers which are deemed to be restrictive in any nature are not taken into consideration.

  31. Normalization – Scenario 1 • US Gulf Coast fuel oil – timing window is 4-12 days ahead of publication date, we normalize to the midpoint of that window (e.g. 8 days): • BP bids for 3%S in two separate windows, starting at $50.50/barrel for 4-6 days out and $51 for 10-12 days out • BP raises 4-6 days out bid to $51/barrel, trades there • BP raises 10-12 days out bid to $51.50/barrel, trades there • There is a contango structure in the market, and we normalize to the midpoint of the timing window – 8 days out, or $51.25/b – and the 3%S assessment reflects this as the mean • In the absence of any physical indications, Platts would use the existing differential plus or minus the 4-12 day forward value. Fixed Price = Forward value +/- differential

  32. Normalization - Quality • The underlying specification basis for Platts assessments represent the typical standards for a specific commodity • If someone bids or offers for a quality that falls outside of these parameters, we normalize for quality based on market value • 3%S with 80 max al+si trades at $50/barrel during the MOC process • As of July 1, the Platts 3%S basis is 130 max al+si, so this represents a premium quality, which market sources surveyed that day identify as a 50 cents/barrel premium • Deal is normalize to $49.50/barrel • Such quality “assessments” vary from day to day depending on market conditions.

  33. Normalization - Freight • Again, the underlying Platts basis provides the standard for the delivery terms and location, and we normalize back to that standard • 3%S deal delivered New Orleans trades at $50/barrel • Specification basis in USGC market is FOB New Orleans • Consensus among barge companies and market sources is that cross-channel freight in Port of New Orleans is 40 cents/barrel • Deal normalized to $49.60/barrel • The freight rates within a port, or from one location outside of the specification basis (e.g. Beaumont versus Houston) also vary from day to day

  34. Platts Assessment Standards Standards represent what is most widely tradeable Deals, bids and offer levels are normalized for standard terms and conditions The Platts methodology is continuously evolving keeping pace with the changes taking place within the market place. Standards are set to ensure that the value of a commodity is fully represented in that commodity’s assessment.

  35. Platts Assessment Standards . . . • Low bids – high offers • The highest bid & lowest offer would represent the boundaries of the assessment for the day. • In order to raise the value of a commodity it would need to be bid at a higher level and similarly it would need to be offered down to prove a lower value. • Platts would not lower the value of a commodity by a “low bid” nor raise the value because of a “high offer”. • Platts would not arrive at an assessment by taking the average of a low bid or high offer or in the event of a wide bid/offer spread.

  36. Platts Assessment Standard – Restrictive bids/offers Example: Company A bids FOB IMTT to load a barge, 25,000 barrels on March 29 only. There are two restrictive elements to this bid, the specific terminal and the fact that they are only willing to load it on 1 day. Therefore the bid could and probably will probably to be higher than other standard bids to be fulfilled. The way to bid this would be to provide a range of dates to load the barge, e.g. 17-19 and provide a location rather than the one terminal, i.e. FOB NYH

  37. US Atlantic Coast fuel oil assessments: proposed changes • Change existing 5-20 day assessment period to 10-25 days. • Change minimum cargo volume from 120,000 barrels to 150,000 barrels. • Tie-in 0.7% metals specs to 1% metals specs • Change 1% metals specs to 100 ppm al+si • Adress changes in the 0.3% HP market

  38. Yahoo IM • US Gulf Coast/Latin America • USGC gasoline: platts_usgc • USGC distillates: platts_usgc1 • USGC resid: plattsusgcresid • USWC: plattsuswc • Latin Products: plattslatinproducts • Latin Crude: plattslatincrude • Canadian crude: plattscanada • US Atlantic Coast: • USAC gasoline: plattsusacgasoline • USAC distillates: plattsusaclightproducts • USAC resid: plattsusacresid • US crude: plattscrude_northamerica; platts_us_benchmarks • US Midwest: plattsmidwestproducts

  39. Platts Management team • Dan Tanz Global Vice President of Editorial dan_tanz@platts.com • John Kingston Global Director of Oil Group john_kingston@platts.com • Jorge Montepeque Global Director of Market Reporting jorge_montepeque@platts.com • Esa Ramasamy Director, Americas Market Reporting esa_ramasamy@platts.com

  40. Q & A

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