Benchmark oil index dealt heavy blow

Calgary Herald ^ | Deborah Yedlin | Deborah Yedlin

[thackney]

Saudi Arabia dealt a big blow to the New York Mercantile Exchange yesterday when it said it was going to start using a new benchmark for oil prices launched last May by the U.K. based oil-trading company, Argus Media.

Instead of using WTI as a reference point for its deals with U.S. customers, which it has done since 1994, the Saudis are switching to a basket of crudes called the Argus Sour Crude Index. The new basket will include sour crudes produced in the Gulf Coast and is expected to be a better reflection of global crude markets.

The reason is quite simple. There has been a huge disconnect between the price of WTI and other crudes produced around the world for the better part of a year. The primary reason is the huge inventory buildup in Cushing, Oklahoma – a land-locked gathering point for North American and Gulf Coast crudes - as a result of the downturn in the U.S. economy that has resulted in significant drops in demand.

It used to be, for instance, that price of Brent would trade at a fairly consistent, yet slim, discount to WTI. This reflected the need of the U.S. to import oil from abroad – if the price of WTI was higher, there was an incentive to buy Brent for use in U.S. refineries. But that’s no longer the case because of the inventory situation. And in the last 12 months, the reference basket of pricing used by the Organization of Petroleum Exporting Countries, has traded at different levels – usually higher – than WTI.

Because of this state of affairs WTI has been losing its status as the benchmark for world crude prices because it is being seen as not representative of the global market. And the Saudi decision is only going to accelerate this further because the expectation is that other countries selling oil to the U.S. could follow suit.

The only good news is that the Argus basket is still priced in U.S. dollars, laying rest to fears that the pricing of the commodity was going to de-link from the greenback.

[thackney]

Ping

Do you think this will make a real difference?

I must agree, WTI no longer comes close to reflecting most of the world’s oil supply.

Main Crude Oils listed by Grade
http://www.bernd-bronowski.de/sides/crude_az.htm

[TLI]

Well, they can tie it to the north fence post but we are still up to our eyeballs in the stuff.

I suppose those parked tankers full of crude are still floating around waiting for a mythical 100 bucks or something...

[SAJ]

Not really. As long as there IS a generally recognised benchmark, that's all that matters in the big picture.

Question is, which grade to use. Can't use Urals -- the Russians are notorious for manipulating supply, and to manipulate supply in a named benchmark grade would be irresistible to them. Bonny is too unstable in a political sense. Brent supplies are declining.

I suppose we'll wind up with some sort of 'basket' as a benchmark, which pretty much sucks.