How a Hasty Move to Change the World’s Key Oil Price Unraveled

By Alex Longley (Bloomberg) —

How do you measure the value of the world’s most important commodity?

It’s a conundrum that brought uproar in the oil market over the past few weeks after S&P Global Platts, the company that publishes the world’s key crude price, announced on Feb. 22 that it was going to radically change the very nature of that benchmark, known as Dated Brent.

Just nine days after announcing its ambitious overhaul, which had been meant to begin in June 2022, Platts was forced to apologize to the market for the suddenness of the move. A week later it went a step further: the changes would be shelved for an as-yet-undefined period.

“It is not surprising that it caused such an uproar in the market,” Adi Imsirovic, senior research fellow at the Oxford Institute for Energy Studies and an experienced oil trader, said in a paper on the reform. The proposal was “nothing short of revolutionary.”

While Platts may have hit pause on the plan, what the saga really highlighted was a more fundamental problem facing the global oil market. Volumes of Brent oil — which gets its name from a Scottish oil field whose production peaked in the 1980s — have slowed to a trickle. Platts widened what constituted ‘Brent’ to include four other grades — Forties, Oseberg, Ekofisk and Troll — but even those are slowly running out.

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. Gas supply deals and a whole host of derivatives — even Brent crude futures — all rely to varying degrees on that one number, published every day some time after 4:30 p.m. in London.

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.

As soon as the changes were announced, it became apparent that parts of the market were unprepared. There was a surge in value and trading of derivatives contracts that reference Dated Brent.

Sellers all but disappeared from the market as uncertainty reigned over how the price would look next year. Both Platts and the Intercontinental Exchange Inc. subsequently issued clarifications that brought prices back down.

Platts says it has made it clear that it will publish a Dated Brent value at the point of loading beyond July 2022. ICE declined to comment.

Before the plans were confirmed, ICE sent Platts a letter saying the changes were too quick. The exchange, responding to Platts’s original proposal in which cargoes would be priced at point of loading, already had open interest in contracts after the proposed implementation date, so it asked for a delay to inform the market of the overhaul, which was granted.

“ICE does not have the luxury of time,” the letter said. “The proposal, if adopted, would represent the most radical change seen in the Brent market thus far.”

Production Problems

While ICE may not have the luxury of time, nor does Platts. The company says loadings of the five benchmark grades will fall below 600,000 barrels — or a single cargo — each day in 2022. They averaged 868,0000 a day last year, according to loading programs compiled by Bloomberg.

Multiple solutions have been floated over the years, from bringing Russian oil into the mix, to barrels from West Africa. There’s also a giant new Norwegian oil field called Johan Sverdrup that could solve the market’s problems at a stroke — if it wasn’t for the heavier and more sulfurous crude it pumps.

Among the solutions proposed to implement Platts’s now-shelved approach was one by trading giant, Trafigura Group to use its Corpus Christi terminal and publish a loading program for U.S. crude supplies. Other market participants also put forward a wide range of ideas for what Platts should do.

It was that spectrum of responses that brought about the delay, Platts said. What comes next will be a series of working groups — organized by Platts for North Sea oil traders, under the guidance of legal counsel — and a push to hammer out an agreement on how North Sea and U.S. oil can trade together.

“We need to be mindful of providing sufficient timelines to all participants in the market, so that they’re able to prepare and be ready,” said Jonty Rushforth, a senior director in the price group at Platts. “But at the same time we’re facing geology, you can’t change the geology.”

© 2021 Bloomberg L.P.

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