Cash Brent traded on BP GT&Cs in first break from SUKO terms
Quantum Commodity Intelligence – The first transactions on the benchmark cash Brent contract have been concluded using the General Terms and Conditions (GT&Cs) of oil major BP, in a break from the standard practice of using the Shell terms and what is potentially the first salvo in the reestablishing of new trading terms for the Brent market.
The deals were reportedly between BP and trading house Vitol for summer 2023 EFP (Exchange of Futures for Physical) timespreads, with the physical cash representing the Brent cash leg, otherwise known as BFOE.
The deals come ahead of next year's historic change to the Platts Dated Brent benchmark, whereby from June, the US WTI Midland grade will be included in the basket of crudes making up deliverable grades.
The market schism comes after Shell announced in late May it would amend its SUKO 90 terms governing forward trades of BFOE, allowing for delivery of US WTI Midland crude in a cash BFOE cargo on a CIF basis, meaning the cash seller would be responsible for vessel chartering.
But crucially, the new SUKO 90 terms for trading in the forward cash BFOE market differ from the proposal by Platts, which is based on WTI Midland crude nominations from the US Gulf Coast on a "Free on Board" (FOB) basis.
Sources told Quantum that BP and Vitol had led the move to align future GT&Cs with the new methodology and hence this week's deals transacted on BP's terms.
The BFOE (Brent) cash price is the equivalent of ICE Brent futures plus the EFP.
Oxford paper
A paper published by The Oxford Institute for Energy Studies (OIES) in July suggested Shell has not realigned its terms to include FOB US due to potential exposure to the US jurisdiction and regulation of the contract, while it could also lead to possible exposure to US tax authorities.
"While it would clearly be useful to have a one standard GT&Cs for the new Brent contract, it is not necessary, especially if the terms are not materially different. It is quite possible that two or more 'terms and conditions' may be used simultaneously," said the paper, authored by former senior crude traders Adi Imsirovic and Kurt Chapman.
Sources said Platts could potentially use more than one set of GT&Cs for its cash Brent assessment, although this might mean applying a 'normalization' process to the methodology.
The OIES paper said it would be essential ultimately to agree on the nature of GT&Cs: "The industry will have to discuss and accept the terms that can be traded and if there are tax impediments to FOB GT&Cs, alternative, delivered terms may have to be accepted, while preserving the FOB nature of the Brent price assessment.
"A standardised Brent Forward contract will also aid in the calculation of the Brent Index which ICE uses to settle the Brent Futures contract."
The paper further said it would be useful for the industry to settle on one standard set of bilateral contractual terms, simplifying the assessments of the price reporting agencies (PRAs).
"If history of the Brent contract is anything to go by, it is likely that two or more GT&Cs may be used in parallel with the industry settling on one only after several years. The issue of quality and terminals remains important, but this can also be implemented over time, through a process of learning and agreement on commonly accepted parameters."
Last week, Platts said it will include the NuStar Corpus Christi, Texas North Beach terminal as a loading terminal for WTI Midland crude oil in its Dated Brent and Cash BFOE benchmarks, coming into effect for June 2023 deliveries.
Six other terminals are also under review by Platts, including Energy Transfer Houston, Pin Oak Corpus Christi, Flint Hills Ingleside, Seabrook Logistics, Buckeye South Texas Gateway, and Plains Corpus Christi.
