After years of mulling over the appetite and consequences, Platts have finally signalled a move to include a CIF price – that of WTI Midland (or W Tim as one industry wag has christened it) – in the Brent Blend basket starting in July 2022.
This is the first, albeit well telegraphed, move towards a CIF future and it marks the beginning of the end of FOB Sullom Voe as the producing region host of the world’s leading oil benchmark and its substitution by a price to be determined within an area of consumption.
This is, in that sense, a bold move. Crude Oil benchmarks have historically found success as production location calculations – a fixed production location providing more stability and less diversity than trying to seek price evidence from a multitude of points of consumption.
Yet it is likely to be a successful development for Platts and, most likely, Brent Blend will sail on unperturbed in the minds of all but a few insiders and theoretical perfectionists. These days Brent is a “brand” and arguably the underlying constituents comprising the brand are immaterial to most as long as a price gets reported in the FT and on the BBC!
So, a seamless continuation of the status quo? Probably, maybe even possibly or certainly, given the overwhelming frictions inherent in stripping out reams of contractual terms referencing the Brent marker worldwide and given the existence of the many forward live contracts containing a Brent pricing provision.
However, care is needed. Much liquidity arises from the linkage between Brent as a physical oil (along with its forward market component) and Brent as a suite of futures contracts hosted by ICE Europe. Those with an exposure to “Brent” and Brent related crude oils use the ICE futures as a hedging mechanism which, along with judicious use of the CFD market, allows for price risk management to take place virtually free of basis risk.
The enabling mechanism is the set of general terms known as SUKO 90. These conditions set out qualifying crude oil streams, cargo sizes, loading conditions etc as paper graduates into physical when contract expiry and time of loading approach.
The advent of W Tim (and other CIF grades in due course) will render SUKO 90 obsolete. Platts intend, with industry input, to write a replacement. Whether it is appropriate for a PRA to be setting out the terms for the physical trading of a significant slug of globally traded crude oil might well raise an eyebrow or two. It is a position of some considerable power and influence.
In the meantime, keep an eye out for contract holders eyeing the opportunity to repudiate existing contractual obligations under the change in benchmark provisions. Should this occur, the disruption would be monumental.
Perhaps though, FOB North Sea is not entirely dead. Argus compile an FOB quote for a new-ish medium sweet North Sea crude oil stream – Johan Sverdrup. Maybe they can up the ante and develop something significant centred around this crude stream and perhaps also incorporating streams such as Forties (along with quality adjustments), to recreate an FOB North Sea marker for those who feel attached to it.
Opportunity knocks – maybe!