By Dave Ernsberger
Head of Oil Content, Platts
Crude oil benchmarks in the Middle East, which play a critical role in the pricing of energy products worldwide and especially in Asia, are entering a period of change. In Platts’ view, change means progress and we have acted to ensure that the important Dubai and Oman crude benchmarks remain fit for purpose over the coming decades.
Dubai crude oil has been the main Asian benchmark since the mid-1980s despite Dubai’s peak production of more than 400,000 b/d in 1991 sliding to below 50,000 b/d today, according to most estimates. Through alternative delivery mechanisms that bring in crude oil traded in the spot market from Abu Dhabi and Qatar, the benchmark has remained relevant to the global oil markets as a ‘brand name’ benchmark, representing the value of more than two million barrels per day of crude oil freely traded in the markets. Like Brent and WTI, Dubai has evolved over time to reflect changes in the markets. Earlier this year, Platts successfully implemented the latest step in the evolution of the Dubai benchmark.
The Dubai crude market has emerged over the last thirty years to become the main physical market reference for crude oil delivered to Asian refineries from the Middle East and Far Eastern Russia. Platts’ Dubai and Oman benchmarks are used to price more than 12 million b/d of Middle Eastern and Russian crude exported to Asia.
Crude and all other major commodities have seen a steady move in trade flows from West to East – predominately to China – over the past decade. The rise of China’s economy has made the country the world’s largest importer of waterborne crude oil. The paradigm shift for oil flows has been particularly obvious in the last eighteen months, with the volumes through Platts’ Dubai price assessment process hitting record highs. Last year’s total volumes reported through the Platts Market on Close process were seven times higher than in 2009.
Following two months of consultation with market participants, an open and transparent process that is standard for us to employ ahead of making changes to our benchmarks, we implemented changes to the Dubai benchmark so that Qatar’s Al Shaheen crude and Abu Dhabi’s Murban would become deliverables, thereby boosting the available liquidity in the daily assessment. This means a volume of over 2.4 million b/d, or three times the volume deliverable into Brent, is now available. This represents comfortably more than 100 cargoes available for trading and delivery during our price assessment process each month.
Trading with the new grades of crude started on January 4, 2016. In a clear sign that the methodology changes are working, a total of 16 cargoes were delivered to Chinaoil from various sellers using Platts’ process over January as a whole, six of which were for Al Shaheen. Nine of those cargoes were Upper Zakum, and one was Oman Blend.
While much attention is paid to the fact that a large Chinese buyer chose to procure some of the cargoes available to the market in the public domain last month, it is important to remember that the benchmark represented the delivery of an array of spot crudes, and the activity of a diverse group of trading companies – including Shell, Reliance, Vitol, Total, BP and others who were also active in our Middle East crude assessment process last month.
Commodities trading used to be akin to the contemporary art market: full of information asymmetries and conflicts of interest. Platts provides transparency, robust methodologies and a level playing field that allow price formation to take place in the open rather than behind closed doors. This gives all market participants robust pricing data and insight on which to base their trading activities.
Building price assessments is a competitive business where the evolving needs of buyers and sellers of crude must be met. Platts is committed to reviewing our methodologies to ensure they are always best suited to measure the markets we cover. In this regard, we are still reviewing whether to introduce a quality premium to Abu Dhabi's Murban to reflect its properties. We also continue to openly engage with market participants in an effort to ensure our benchmarks remain relevant.
Platts’ priority is to ensure that our assessments reflect actual market behaviour in the physical spot markets, with futures and other derivatives acting as signposts towards a natural evolution of a robust physical spot market. It is not our role to regulate trading in the physical markets where we produce price assessments. If we were to become aware of market abuse, we would investigate and take all appropriate steps.
Trade flows are changing. The US has now become a crude exporter and China has become the world’s largest importer of crude moving in tankers. The fact that such a tectonic shift is occurring is causing anxieties to market participants. Yet the crude market we are assessing is not showing signs of distress or unusual behaviour – it is indeed a functioning market where supply and demand inform price discovery.
As part of Platts’ role as a provider of price assessments, we remain fully committed to the integrity and transparency of our processes and methodology. We will be keeping an eye on the future to ensure the Dubai benchmark evolves to reflect market changes.
Source: The Gulf Intelligence