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