24/12/20
Viewpoint: More changes for Dated crude benchmark ahead
London, 20 December (Argus) — The crude market has adjusted to the presence of
US WTI in the Dated basket, but the past year has revealed some hiccups,
suggesting more changes will be needed to the benchmark's structure. WTI has
been a part of Dated for more than a year, in which time it has bought
much-needed liquidity to a shrinking amount of physical crude underpinning the
benchmark, and has encouraged a return of some old, long-absent market
participants and the entry of a few new ones. WTI has introduced more
transparency to Dated, making it much more easily accessible. While some traders
feared the grade would arrest any volatility, which is necessary for trading
companies to thrive, this has not happened. Instead, WTI has effectively tied
the European market to the US one, with European Ice Brent futures following WTI
Nymex futures very closely. But recent months have exposed some flaws,
suggesting some more changes to the benchmark are needed. European refiners run
as much as 4.5mn b/d of light sweet crude, Vortexa data show. Dated was designed
to represent the price moves of this large market via a few crudes produced, and
mostly consumed, in the region. But production of several component grades have
shrunk because of natural decline at North Sea fields. Production of Brent, the
benchmark's namesake grade, has fallen from above 400,000 b/d in 2001 to just
38,000 b/d this year. Forties' exports dropped from more than 600,000 b/d to
175,000 b/d in the same time. Therefore it seemed fair when Dated was set by WTI
nearly half of the time, as it is the single largest crude that European
refiners buy, accounting for around 14pc of all their supplies. The situation
reversed in the last weeks of 2024. WTI has not set Dated since 11 October, with
that duty mostly shared between Oseberg, Ekofisk and Troll. But values of these
grades — especially Oseberg and Troll — are rather theoretical, due to low
liquidity of just 2-5 cargoes a month. It is not uncommon to see bids for those
grades in the window, when the scarce supplies loading on the dates covered by
bids are already placed. The same applies to Brent, for which loadings range
between just 1-2 cargoes every month. WTI and Forties have greater liquidity,
allowing them to be more representative of Europe's light sweet market, but
their recent marginal role in setting the benchmark price raises a question if
grades like Brent, Oseberg and Troll need to be in the basket at all. QPs an
almighty relic of the past It might feel counterintuitive that smaller and more
expensive grades affect the price of Dated — which is set by the cheapest grade
in the basket. But Oseberg, Ekofisk and Troll, which are typically more
expensive on a fob basis than is WTI on a delivered-Europe basis, are adjusted
by quality premiums (QPs) for benchmarking purposes. QPs are calculated at 60pc
of the difference between each grade and the most competitive of the six
benchmark grades in the second month prior to the month of loading. The
mechanism was made for a basket of crudes that originate in the North Sea and
trade on a fob basis. Inclusion of WTI, which in turn is adjusted by
intra-European freight to make it a fob price in the North Sea, has widened QPs
for the three grades. With price spreads between pricier and cheaper benchmark
grades increasingly dependent on volumes of WTI coming to Europe, such an
adjustment does not seem to serve its purpose anymore. By Lina Bulyk Send
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