Platts floats idea of including FOB US Gulf crude in North Sea benchmark

Quantum Commodity Intelligence – The US Gulf crude export grade WTI Midland and Norway's Johan Sverdrup barrels in the North Sea have been identified as the most suitable crude streams for additions to the Dated Brent 'basket' of grades, said S&P Global Platts and ICE in a joint-paper published Wednesday.

With North Sea Brent barrels and other basket crudes in long-term decline, such as Forties Oseberg and Ekofisk, the price reporting agency is seeking a way to increase liquidity in its Dated Brent benchmark - the main international benchmark used to price crude oil.

The move comes after Price Reporting Agency Platts proposed in February to add WTI Midland as a Dated Brent delivery grade, but more controversially change the basis of Dated Brent to CIF Rotterdam, rather than the long-standing basis FOB North Sea.

Exchange-operator ICE, which hosts the Brent futures contract, was one of the primary objectors to the switch to CIF Rotterdam pricing.

"In the majority of discussions that Platts and ICE have conducted separately, industry opinion has largely centred on two possible streams of crude coming into Dated Brent: Johan Sverdrup and WTI Midland. Each could provide a large influx of oil, but each comes with its own challenges," said the paper.

Addressing CIF-delivery, the paper said; "A significant number of market participants have stated that they would prefer the (Brent) complex to remain on an FOB basis," but noted that CIF-delivered North Sea grades are already used for the Dated Brent assessment.

Platts said it decided not to go ahead with its proposal to move the benchmark to CIF, but, since then, industry participants have "created and shared new ideas" around an FOB-loading WTI Midland element for the cash BFOE forward market.

Although ICE Brent futures are cash-settled against cash BFOE, the cash market is a deliverable instrument into the physical Dated market; essentially meaning that methodology for the two should be aligned.

Midland FOB USG

"Through their consultation notices, Platts and ICE will seek further feedback and ideas on how a FOB Gulf Coast WTI Midland forward contract would work, given that, with time adjustment for sailing time to the North Sea, equivalence can come from US waters, rather than European ones."

The paper said that a FOB forward contract based in Houston and the surrounding area could offer cash BFOE sellers an extra option for deliveries into Europe or beyond, "in a well-known and ever-growing fleet of Aframax vessels", much like those already picking up North Sea crude.

The paper also said that CIF deliveries could be reflected in the MOC process, adjusted to an FOB value alongside the other Dated grades, in order "to maintain the FOB Dated Brent assessment".

"In this way, the Brent complex of physical and financial instruments could remain on the same basis they currently occupy, only with the addition of FOB Gulf Coast WTI Midland as a major component."

Consultant Jorge Montepeque, who designed the original concept of alternative-delivery grades for Dated Brent, said, ''the proposed use of FOB USG WTI in Dated Brent is a Trojan horse for companies that have struggled to enter the lucrative US crude market." 

Sverdrup

Johan Sverdrup would provide a major liquidity boost with daily production recently crossing 500,000 bpd, making it the largest stream in the North Sea.

A report published by rival-PRA Argus on June 14 noted that current grades Brent, Forties, Oseberg, Ekofisk and Troll are in decline, with summer loadings slumping to a record low of 600,000 barrels per day.

The main objection to Johan Sverdrup is its quality, which Platts/ICE said at 28 API gravity is much heavier than current North Sea benchmark grades, meaning it is more fuel oil heavy and should have different pricing dynamics.

"The gravity of the current grades is generally 10 API degrees higher than Johan Sverdrup, and so users of the Brent benchmark expect it to reflect the value of lower density crude. Escalating for both sulfur and gravity would add to the complexity of the benchmark and associated instruments and runs the risk of Brent becoming in effect a heavy, sour benchmark, for which there are already notable alternatives," said the Platts/ICE paper.

The paper also noted that the largest share of Johan Sverdrup is owned by Norwegian major Equinor, which is also a significant equity holder of the other grades already part of the basket.

"Quality and fundamental issues aside, there is no doubt that Johan Sverdrup 'looks' most similar to the existing basket in terms of location and trade structure, and as a result it holds strong appeal as a possible addition to the Brent complex to several market participants,"

The deadline for comments and feedback is September 30.