Hurdles remain for WTI addition to benchmark

Spanish Market: Crude oil
21/02/22

Price reporting agency Platts will again attempt to add WTI to its Dated Brent benchmark, but questions remain about the practicality and merits of the move.

Platts is proposing to include WTI Midland cargoes from the US Gulf coast into Dated Brent and the North Sea forward — or Cash BFOE — market. The changes would take effect for cargoes loading in June 2023. It also proposes to increase the size of the North Sea cargoes it assesses for benchmarking purposes, from 600,000 bl to 700,000 bl, to match the typical size of WTI cargoes delivered to Europe. The agency abandoned last year's plan to convert Dated Brent from its fob North Sea status into a cif Rotterdam benchmark, following fierce criticism. Instead, cargoes of WTI trading on a cif Rotterdam basis will be converted to a virtual fob North Sea basis, to bring them into line with Brent, Forties, Oseberg, Ekofisk and Troll. Argus, which competes with Platts to provide oil price assessments and has an equivalent North Sea Dated benchmark, has been running such a price — New North Sea Dated — since 2019.

The difference between the Argus New North Sea Dated price and the proposals from Platts is the inclusion of a 40pc "freight factor", which it is hoped will stop a material drop in the price of Dated Brent once WTI is added. Argus uses a cif Rotterdam WTI assessment in New North Sea Dated, with the cost of freight from Rotterdam to a virtual North Sea fob location subtracted. This virtual fob North Sea WTI price can then be compared with the other five fob North Sea grades in the Dated basket for benchmarking purposes. Platts proposes to use the same system, but to only subtract 40pc of the cross-North Sea freight rate from WTI, thereby inflating the price of WTI relative to the other grades.

Despite this, the effect of including WTI is still likely to be a lower price. WTI regularly trades at a discount to North Sea grades once freight is subtracted. New North Sea Dated was, on average, 74¢/bl lower than North Sea Dated last year, falling to a wide $2.22/bl discount in May (see graph). Even with a 40pc "freight factor", the inclusion of WTI in the benchmark will result in a lower Dated Brent price. WTI set New North Sea Dated as the lowest priced of the six grades 85pc of the time in 2021. If only 40pc of the freight rate had been subtracted, WTI would still have set the benchmark 63pc of the time, Argus estimates.

Known unknowns

The mechanisms for WTI's inclusion into the Cash BFOE contract are similar to proposals last year from BP. The major difference is Platts' insistence that loading programmes at the US Gulf coast would be needed for WTI to be deliverable into the Cash BFOE contract. At present, there are no loading programmes and the lack of clear information about availabilities might prove to be the main obstacle to WTI's inclusion. US exporters currently have optionality to move or cancel WTI loading slots, allowing for pipeline delivery to US refineries instead of the export market if the economics favour it, which they will be reluctant to surrender. Even if programmes are issued, there is no guarantee that cargoes on the programme will all be available for European buyers. Valuing a contract when one side of the supply-demand equation is unknowable could prove difficult.

This is not really Platts' problem to resolve. Platts uses trade in the Cash BFOE contract to assess the forward price that underpins Dated Brent. But the terms of the contract are decided by the market. At present, these terms are codified by Shell in its Suko 90 contract. BP last year volunteered to rewrite the contract.

Platts and Ice carried out a joint consultation into the future of the Brent complex last year. But the latest proposals are Platts' alone. Ice issued a separate statement about working with the industry on "further developing this proposal".

By Michael Carolan

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