Giving in to industry pressure, S&P Global Platts, a commodities and energy pricing agency, deferred its plans two weeks after it announced to bring changes to the dated Brent oil benchmark.
On February 22, Platts had announced including US crude WTI Midland in the Brent assessment — the world's biggest crude benchmark. The announcement was due to take effect from July 2022, according to a Reuters report. This was a major change to what has been an exclusively North Sea-based assessment.
However, the company, following the uproar in the oil market, has now opened consultations with industry players without fixing a timeline for changes to take effect.
What is dated Brent?
It’s a benchmark assessment of the price of physical, light North Sea crude oil. The term “dated” refers to the specific delivery dates assigned to physical cargoes of crude oil in the North Sea. The Platts Dated Brent benchmark, published daily, is an analysis of the activity, and an assessment of the price of dated Brent in the North Sea crude marketplace.
Brent price indicators are used as a reference for measuring the value of crude oil across the world. It’s also a measure of global economic health.
Why is this move by S&P Global Platts so significant?
This move assumes a lot of significance because the Brent benchmark is crucial to the global oil system. It is used to price over half the world’s physical crude trades. Brent oil gets its name from a Scottish oil field whose production peaked in the 80s.
Adi Imsirovic, a senior research fellow at the Oxford Institute for Energy Studies and an experienced oil trader, said Platts’ idea was “revolutionary” and it was no surprise that it caused such a row in the market.
“The key problem with the proposal is it would likely undermine and possibly destroy the forward Brent market. The whole plethora of derivatives contracts ... would probably change or disappear,” Imsirovic wrote last week.
According to a Bloomberg report, as the proposal to bring in changes was announced, it became clear that not the entire market was prepared. There was a surge in value and trading of derivatives contracts that reference Dated Brent, the report said.
Since nobody was certain about how changes would reflect in prices, the sellers withdrew themselves from the market following which Platts and the Intercontinental Exchange Inc. (ICE) issued clarifications bringing prices back down.
Why is time so important?
Volumes of Brent oil have slowed to a trickle. With fewer barrels to trade, the decline poses a threat to the reliability and credibility of a measure that affects everything from crude oil transactions, to long-term refining and drilling contracts. all rely to varying degrees on that one number, published every day sometime after 4:30pm in London.
On March 3, Joel Hanley, the global director, crude and fuel oil at Platts, said during an online workshop that the company had received overwhelming feedback about WTI Midland coming into dated Brent making sense, “given the continued depletion of North Sea crude oil fields”.
According to a report on the company website, while some traders have welcomed the move, others have expressed concerns over the potential impact on derivatives.
Are there any solutions in place?
Platts’s idea was radical: add American crude into the mix and base its flagship oil price assessment on the trading of delivered cargoes, a move that effectively adds the cost of shipping to the price. Until now they have been based on the prices of barrels as they are loaded.
Jonty Rushforth, a senior director in the Platts price group, said that sufficient timelines should be provided to all the market participants, so that they are prepared for the change.
Several solutions, including bringing Russian oil as well as West Africa, have been suggested to address the problem. Global commodities trader Trafigura, too, suggested that its Corpus Christi terminal be used to publish a program for US crude supplies.
According to a report in the S&P Global website, “Platts Dated Brent price assessments have undergone a number of changes over time, intended to ensure their relevance in changing market conditions. With the decline of UK fields such as Brent, a number of Norwegian grades have been added, most recently the Troll crude blend, in 2018.”
(Edited by : Yashi)