Can price re­port­ing agen­cies aim at the fu­tures mar­ket?

Arab News - - Business News - FAISAL FAEQ

When WTI crude oil prices turned neg­a­tive for the first time in history, it caused chaos in the in­dus­try. The prob­lem oc­curred in Cush­ing, Ok­la­homa (and it will only hap­pen here), which is the de­liv­ery point for WTI crude.

When there were more sell­ers than buy­ers, the stor­age fa­cil­ity be­came full and be­cause of lock­down mea­sures there were no trucks to take the oil any­where else to re­lieve the pres­sure. Still, the un­prece­dented event has at­tracted scru­tiny and even raised ques­tions about the vi­a­bil­ity of some in­ter­na­tional oil bench­marks. Ever since that day on April 20, when US crude fu­tures col­lapsed and prices turned to a neg­a­tive $40 per bar­rel, the US oil mar­ket has been look­ing for an al­ter­na­tive to Cush­ing.

Last week news emerged that oil pric­ing agen­cies (PRA) will launch new US crude bench­marks to re­flect the price of Gulf Coast­traded crude on tankers, a break from the old land­locked sys­tem. This rep­re­sents a po­ten­tial chal­lenge to Cush­ing.

US crude oil con­tin­ues to trade from the US Gulf Coast and it re­flects prices for oil at Cush­ing stor­age fa­cil­i­ties. All of this will con­tinue to be quoted as a pre­mium or dis­count to WTI on the NYMEX fu­tures ex­change.

While the im­pact on the oil price re­port­ing agen­cies (PRA) is tan­gi­ble, it is ques­tion­able whether these agen­cies im­pact the fu­tures mar­kets.

PRAs will con­tinue to pub­lish prices for phys­i­cal oil only as their role is to pro­vide daily price as­sess­ments to buy and sell phys­i­cal crude. The ul­ti­mate ques­tion re­mains how will traders and spec­u­la­tors hedge on these new US crude bench­marks?

Tech­ni­cally traders will now have the op­tion of us­ing a new bench­mark that will rep­re­sent the crude qual­ity of the US Gulf Coast medium sour crude grades. Mean­while the WTI plat­form will trade the light sweet crude that not only rep­re­sents the WTI Mid­land crude but also the abun­dance of US shale. Also, it is worth re­mem­ber­ing that other ex­changes, such as the In­ter­con­ti­nen­tal Ex­change “ICE” and CME Group, launched fu­tures con­tracts de­liv­er­able at ter­mi­nals in Hous­ton in 2018.

But this did not suc­ceed in es­tab­lish­ing a bench­mark that re­flects the ex­port trade, and vol­umes have been muted com­pared to WTI de­liv­ered to Cush­ing.

This dilemma may keep the oil fu­tures mar­ket in the US torn be­tween the land­locked WTI that failed to rep­re­sent the eco­nomics of crude oil in this mar­ket and the other newly in­tro­duced bench­marks that still need time.

The di­chotomy be­tween the phys­i­cal and fu­tures mar­ket is likely to in­crease.

Per­haps what we need to see is not an­other bench­mark but rather all mar­ket par­tic­i­pants work si­mul­ta­ne­ously on both the fu­tures and phys­i­cal mar­kets.

Faisal Faeq is an en­ergy and oil mar­ket­ing ad­viser. He was for­merly with OPEC and Saudi Aramco. Twit­ter:@faisal­faeq

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