DOCSLIB.ORG

An Anatomy of the Crude Oil Pricing System

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
An Anatomy of the Crude Oil Pricing System An Anatomy of the Crude Oil Pricing System Bassam Fattouh1 WPM 40 January 2011 1 Bassam Fattouh is the Director of the Oil and Middle East Programme at the Oxford Institute for Energy Studies; Research Fellow at St Antony‟s College, Oxford University; and Professor of Finance and Management at the School of Oriental and African Studies, University of London. I would like to express my gratitude to Argus for supplying me with much of the data that underlie this research. I would also like to thank Platts for providing me with the data for Figure 21 and CME Group for providing me with the data for Figure 13. The paper has benefited greatly from the helpful comments of Robert Mabro and Christopher Allsopp and many commentators who preferred to remain anonymous but whose comments provided a major source of information for this study. The paper also benefited from the comments received in seminars at the Department of Energy and Climate Change, UK, ENI, Milan and Oxford Institute for Energy Studies, Oxford. Finally, I would like to thank those individuals who have given their time for face-to-face and/or phone interviews and have been willing to share their views and expertise. Any remaining errors are my own. 1 The contents of this paper are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its members. Copyright © 2011 Oxford Institute for Energy Studies (Registered Charity, No. 286084) This publication may be reproduced in part for educational or non-profit purposes without special permission from the copyright holder, provided acknowledgment of the source is made. No use of this publication may be made for resale or for any other commercial purpose whatsoever without prior permission in writing from the Oxford Institute for Energy Studies. ISBN 978-1-907555-20-6 2 Contents Summary Report ........................................................................................................................................... 6 1. Introduction ......................................................................................................................................... 11 2. Historical Background to the International Oil Pricing System .......................................................... 14 The Era of the Posted Price ..................................................................................................................... 14 The Pricing System Shaken but Not Broken .......................................................................................... 14 The Emergence of the OPEC Administered Pricing System .................................................................. 15 The Consolidation of the OPEC Administered Pricing System .............................................................. 16 The Genesis of the Crude Oil Market ..................................................................................................... 17 The Collapse of the OPEC Administered Pricing System ...................................................................... 18 3. The Market-Related Oil Pricing System and Formulae Pricing ......................................................... 20 Spot Markets, Long-Term Contracts and Formula Pricing ..................................................................... 20 Benchmarks in Formulae Pricing ............................................................................................................ 24 4. Oil Price Reporting Agencies and the Price Discovery Process ......................................................... 30 5. The Brent Market and Its Layers ........................................................................................................ 36 The Physical Base of North Sea .............................................................................................................. 37 The Layers and Financial Instruments of the Brent Market ................................................................... 39 Data Issues .......................................................................................................................................... 39 The Forward Brent .............................................................................................................................. 40 The Brent Futures Market ................................................................................................................... 43 The Exchange for Physicals ................................................................................................................ 44 The Dated Brent/BFOE ....................................................................................................................... 45 The Contract for Differences (CFDs) ................................................................................................. 45 OTC Derivatives ................................................................................................................................. 48 The Process of Oil Price Identification in the Brent Market ................................................................... 50 6. The US Benchmarks ........................................................................................................................... 52 The Physical Base for US Benchmarks .................................................................................................. 52 The Layers and Financial Instruments of WTI ....................................................................................... 55 The Price Discovery Process in the US Market ...................................................................................... 56 WTI: The Broken Benchmark? ............................................................................................................... 58 7. The Dubai-Oman Market .................................................................................................................... 61 The Physical Base of Dubai and Oman .................................................................................................. 61 The Financial Layers of Dubai................................................................................................................ 62 3 The Price Discovery Process in the Dubai Market ................................................................................. 64 Oman and its Financial Layers: A New Benchmark in the Making?...................................................... 66 8. Assessment and Evaluation ................................................................................................................. 70 Physical Liquidity of Benchmarks .......................................................................................................... 70 Shifts in Global Oil Demand Dynamics and Benchmarks ...................................................................... 71 The Nature of Players and the Oil Price Formation Process ................................................................... 73 The Linkages between Physical Benchmarks and Financial Layers ....................................................... 74 Adjustments in Price Differentials versus Price Levels .......................................................................... 74 Transparency and Accuracy of Information ........................................................................................... 76 9. Conclusions ......................................................................................................................................... 78 References ................................................................................................................................................... 81 List of Figures Figure 1: Price Differentials of Various Types of Saudi Arabia‟s Crude Oil to Asia in $/Barrel .............. 21 Figure 2: Differentials of Term Prices between Saudi Arabia Light and Iran Light Destined to Asia (FOB) (In US cents) ............................................................................................................................................... 23 Figure 3: Difference in Term Prices for Various Crude Oil Grades to the US Gulf (Delivered) and Asia (FOB) .......................................................................................................................................................... 24 Figure 4: Price Differential between Dated Brent and BWAVE ($/Barrel) ............................................... 26 Figure 5: Price Differential between WTI and ASCI ($/Barrel) (ASCI Price=0) ....................................... 26 Figure 6: Brent Production by Company (cargoes per year), 2007 ............................................................ 37 Figure 7: Falling output of BFO ................................................................................................................. 38 Figure 8: Trading Volume and Number of Participants in the 21-Day BFOE Market ............................... 42 Figure 9: Average Daily Volume and Open Interest of ICE Brent Futures Contract ................................. 44 Figure 10: Pricing basis of Dated Brent Deals (1986-1991); Percentage of Total Deals ........................... 45 Figure 11: Reported Trade on North Sea CFDs (b/d) ................................................................................. 46 Figure 12: US PADDS ...............................................................................................................................
Load more

Recommended publications
  • Middle East Oil Pricing Systems in Flux Introduction
    May 2021: ISSUE 128 MIDDLE EAST OIL PRICING SYSTEMS IN FLUX INTRODUCTION ........................................................................................................................................................................ 2 THE GULF/ASIA BENCHMARKS: SETTING THE SCENE...................................................................................................... 5 Adi Imsirovic THE SHIFT IN CRUDE AND PRODUCT FLOWS ..................................................................................................................... 8 Reid l'Anson and Kevin Wright THE DUBAI BENCHMARK: EVOLUTION AND RESILIENCE ............................................................................................... 12 Dave Ernsberger MIDDLE EAST AND ASIA OIL PRICING—BENCHMARKS AND TRADING OPPORTUNITIES......................................... 15 Paul Young THE PROSPECTS OF MURBAN AS A BENCHMARK .......................................................................................................... 18 Michael Wittner IFAD: A LURCHING START IN A SANDY ROAD .................................................................................................................. 22 Jorge Montepeque THE SECOND SPLIT: BASRAH MEDIUM AND THE CHALLENGE OF IRAQI CRUDE QUALITY...................................... 29 Ahmed Mehdi CHINA’S SHANGHAI INE CRUDE FUTURES: HAPPY ACCIDENT VERSUS OVERDESIGN ............................................. 33 Tom Reed FUJAIRAH’S RISE TO PROMINENCE ..................................................................................................................................
    [Show full text]
  • Download This PDF File
    Journal of Ecocriticism 6(1) Spring 2014 Tall-fins and tale-ends in Taiwan: cetacean exploitation, oil refineries, and Moby-Dick1 Iris Ralph (Tamkang University)1 Abstract This article addresses the nineteenth-century novel MoBy-Dick (1851) as a “cetacean text” and as a text that can be taught to question the animal/human Binary that both separates and draws attention to Bonds Between humans and cetaceans. Herman Melville’s novel, Belonging to the period of American literature that F. O. Matthiessen first famously distinguished as the “American Renaissance” in a study so-titled puBlished in 1941, is Being reevaluated today By ecocritics as well as posthumanism and animal studies scholars as a writing that is a cultural record of the North American whaling industry in the eighteenth and nineteenth centuries and raises questions aBout understandings of and assumptions about cetacean slaughter. I tie these concerns to an industry today that threatens cetaceans: the fossil fuel industry, the industry that largely replaced the whaling industry after the twentieth century. I focus mostly on environmental efforts in Taiwan to raise awareness aBout the fossil fuel industry in Taiwan, namely its petrochemical plants or so called naphtha cracker plants and the deleterious impact these plants have on coastal wetland areas that are home to many species of cetaceans including the endangered species of humpBack whale or pink dolphin. Moby-Dick ties to ecocriticism in the eastern regions of the gloBe not the least by reason of the final scenes of the
    [Show full text]
  • WTI Crude Oil West Texas Intermediate
    WTI Crude Oil West Texas Intermediate Alexander Filitz Minh Khoa Nguyen Outline • Crude Oil • Value Chain • Politics • Market • Demand • Facts & Figures • Discussion Crude Oil • Flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds • Is recovered mostly through oil drilling • In its strictest sense, petroleum includes only crude oil, but in common usage it includes all liquid, gaseous, and solid hydrocarbons. • An oil well produces predominantly crude oil, with some natural gas dissolved in it Classification • By the geographic location it is produced in • Its API gravity (an oil industry measure of density) • Its sulfur content • Some of the common reference crudes are: • West Texas Intermediate (WTI), a very high-quality, sweet, light oil delivered at Cushing, Oklahoma for North American oil. • Brent Blend, comprising 15 oils from fields in the North Sea. • Dubai-Oman, used as benchmark for Middle East sour crude oil flowing to the Asia-Pacific region • The OPEC Reference Basket, a weighted average of oil blends from various OPEC (The Organization of the Petroleum Exporting Countries) countries West Texas Intermediate • Also known as Texas light sweet, used as a benchmark in oil pricing • API gravity of around 39.6 and specific gravity of 0.827 and 0.24% sulfur • WTI is refined mostly in the Midwest and Gulf Coast regions in the U.S • It is the underlying commodity of New York Mercantile Exchange's (NYMEX) oil futures contracts • Often referenced in news reports
    [Show full text]
  • Global Energy 2012 Conference & Exhibition
    GLOBAL 12 ENERGY 20 29/30/31 OCTOBER 2012 HOTEL PRESIDENT WILSON Global Energy Geneva 2012 Where the oil & gas trade meets...with key participation of Cargill, Gunvor, Lundin, Lukoil, Mercuria, Socar, Trafigura To register: www.globalenergygeneva.com GLOBAL 12 ENERGY 20 GLOBAL ENERGY 2012 CONFERENCE & EXHIBITION 29/30/31 October 2012, Hotel President Wilson, Geneva T: +41 (0) 22 321 74 80 | F: +41 (0) 22 321 74 82 | E: [email protected] | www.globalenergygeneva.com About Global Energy 2012 The oil and gas trade is critical to the global economy and the effect of energy prices and trade is more profound than for any other traded commodity. Global Energy is a trade show, conference and exhibition unique to Geneva. Global Energy 2012 is being held on October 29/30/31 at the prestigious Hotel President Wilson in the heart of Geneva. The event brings together energy traders, banks, policymakers, delivering important keynote speeches and panel debates. Global Energy 2012 takes place during an important week in the Geneva commodities trade calendar. It will be attended by a “who’s who” in oil and gas in Switzerland and abroad. Who will attend Global Energy 2012? Major international oil & gas trading firms Traders from small and medium-sized firms throughout the globe Leaders in the Swiss energy trade community Upstream oil and gas majors – interested in the global S&D of oil and gas Oil and gas investors, including family offices and private banks Trade financiers specialising in oil and gas Professional firms: lawyers, advisory/management
    [Show full text]
  • Climate and Energy Benchmark in Oil and Gas Insights Report
    Climate and Energy Benchmark in Oil and Gas Insights Report Partners XxxxContents Introduction 3 Five key findings 5 Key finding 1: Staying within 1.5°C means companies must 6 keep oil and gas in the ground Key finding 2: Smoke and mirrors: companies are deflecting 8 attention from their inaction and ineffective climate strategies Key finding 3: Greatest contributors to climate change show 11 limited recognition of emissions responsibility through targets and planning Key finding 4: Empty promises: companies’ capital 12 expenditure in low-carbon technologies not nearly enough Key finding 5:National oil companies: big emissions, 16 little transparency, virtually no accountability Ranking 19 Module Summaries 25 Module 1: Targets 25 Module 2: Material Investment 28 Module 3: Intangible Investment 31 Module 4: Sold Products 32 Module 5: Management 34 Module 6: Supplier Engagement 37 Module 7: Client Engagement 39 Module 8: Policy Engagement 41 Module 9: Business Model 43 CLIMATE AND ENERGY BENCHMARK IN OIL AND GAS - INSIGHTS REPORT 2 Introduction Our world needs a major decarbonisation and energy transformation to WBA’s Climate and Energy Benchmark measures and ranks the world’s prevent the climate crisis we’re facing and meet the Paris Agreement goal 100 most influential oil and gas companies on their low-carbon transition. of limiting global warming to 1.5°C. Without urgent climate action, we will The Oil and Gas Benchmark is the first comprehensive assessment experience more extreme weather events, rising sea levels and immense of companies in the oil and gas sector using the International Energy negative impacts on ecosystems.
    [Show full text]
  • Specifications Guide Americas Refined Oil Products Latest Update: September 2021
    Specifications Guide Americas Refined Oil Products Latest update: September 2021 Definitions of the trading locations for which Platts publishes daily indexes or assessments 2 LPG/NGLs 6 Gasoline 14 Blendstocks 18 Naphtha 19 Jet fuel 23 Heating oil 27 Diesel 32 Fuel oil 36 Feedstocks 40 Lubes and asphalt 41 US futures 42 Revision history 43 www.spglobal.com/platts Specifications Guide Americas Refined Oil Products: September 2021 DEFINITIONS OF THE TRADING LOCATIONS FOR WHICH PLATTS PUBLISHES DAILY INDEXES OR ASSESSMENTS All the assessments listed here employ S&P Global Platts Platts understands that there are various public dock clauses The Platts assessment process determines the value of physical Assessments Methodology, as published at https://www. used in the spot market. In the event that terminal dates do not commodities for forward delivery or loading at a wide variety spglobal.com/platts/plattscontent/_assets/_files/en/our- meet the reported transaction laycan, the terminal party could of locations across the Americas. Many of these commodities methodology/methodology-specifications/platts-assessments- apply these clauses to extend demurrage liabilities for the vessel trade on an outright price basis – where the full price is known methodology-guide.pdf. party. For example, if a terminal date obtained was two days at time of trade -- or on a Platts-related, floating price basis – after the transaction laycan, and the vessel arrives within the where much of the value is determined in reference to reference These guides are designed to give Platts subscribers as much transaction laycan, the vessel party could be liable for those two prices that will be published in the future.
    [Show full text]
  • Long-Term Prospects for Northwest European Refining
    LONG-TERM PROSPECTS FOR NORTHWEST EUROPEAN REFINING ASYMMETRIC CHANGE: A LOOMING GOVERNMENT DILEMMA? ROBBERT VAN DEN BERGH MICHIEL NIVARD MAURITS KREIJKES CIEP PAPER 2016 | 01 CIEP is affiliated to the Netherlands Institute of International Relations ‘Clingendael’. CIEP acts as an independent forum for governments, non-governmental organizations, the private sector, media, politicians and all others interested in changes and developments in the energy sector. CIEP organizes lectures, seminars, conferences and roundtable discussions. In addition, CIEP members of staff lecture in a variety of courses and training programmes. CIEP’s research, training and activities focus on two themes: • European energy market developments and policy-making; • Geopolitics of energy policy-making and energy markets CIEP is endorsed by the Dutch Ministry of Economic Affairs, the Dutch Ministry of Foreign Affairs, the Dutch Ministry of Infrastructure and the Environment, BP Europe SE- BP Nederland, Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. ('Rabobank'), Delta N.V., ENGIE Energie Nederland N.V., ENGIE E&P Nederland B.V., Eneco Holding N.V., EBN B.V., Essent N.V., Esso Nederland B.V., GasTerra B.V., N.V. Nederlandse Gasunie, Heerema Marine Contractors Nederland B.V., ING Commercial Banking, Nederlandse Aardolie Maatschappij B.V., N.V. NUON Energy, TenneT TSO B.V., Oranje-Nassau Energie B.V., Havenbedrijf Rotterdam N.V., Shell Nederland B.V., TAQA Energy B.V.,Total E&P Nederland B.V., Koninklijke Vopak N.V. and Wintershall Nederland B.V. CIEP Energy
    [Show full text]
  • Price Forecast June 30, 2015 Contents
    Resource Evaluation & Advisory Price forecast June 30, 2015 Contents Canadian price forecast 1 International price forecast 5 Global outlook 6 Western Canada royalty comparison 8 Pricing philosophy 11 Glossary 12 Canadian domestic price forecast Forecast commentary Andrew Botterill Senior Manager, Resource Evaluation & Advisory “Everything is in a state of fl ux, including status quo” - Robert Byrne As industry adjusts to the “new normal” we have analyzed This narrowing has been most notable on the heavy oil in our last two forecasts, activities in the energy sector side, where diff erentials have decreased more than 30 per are beginning to demonstrate a cautious, but optimistic cent compared with where they were in summer 2014. view of the future. While not anticipating $100 oil in the With greater than 60 per cent of Canadian production near term, these views show an expectation industry will being from oil sands (CAPP 2015 forecast report) the bring a more focused approach to North American oil narrowing of heavy diff erentials is welcome news to much development within the coming 12 to 18 months. of the sector. In recent weeks, the WTI to heavy diff erential has been narrower than we have seen recently as In recent weeks, Canadian-received oil prices have been production from some projects was shut-in due to wildfi res stronger relative to the beginning of the year, with daily in northern Alberta. The shut-in production has since been WTI settlements hovering around $60/bbl USD and brought back on-stream, which has slowed the narrowing Canadian Light settlements greater than $70/bbl CAD.
    [Show full text]
  • The Cost of Pipeline Constraints in Canada by Elmira Aliakbari and Ashley Stedman
    FRASER RESEARCH BULLETIN FROM THE CENTRE FOR NATURAL RESOURCE STUDIES May 2018 The Cost of Pipeline Constraints in Canada by Elmira Aliakbari and Ashley Stedman MAIN CONCLUSIONS Despite the steady growth in crude oil From 2013 to 2017, after accounting for available for export, new pipeline proj- quality differences and transportation ects in Canada continue to face delays costs, the depressed price for Canadian related to environmental and regula- heavy crude oil has resulted in CA$20.7 tory impediments as well as political billion in foregone revenues for the Ca- opposition. nadian energy industry. This significant loss is equivalent to almost 1 percent of Canada’s lack of adequate pipeline ca- Canada’s national GDP. pacity has imposed a number of costly constraints on the nation’s energy sec- In 2018, the average price differen- tor including an overdependence on tial (based on the first quarter) was the US market and reliance on more US$26.30 per barrel. If the price differ- costly modes of energy transportation. ential remains at the current level, we These and other factors have resulted estimate that Canada’s pipeline con- in depressed prices for Canadian heavy straints will reduce revenues for Cana- crude (Western Canada Select) relative dian energy firms by roughly CA$15.8 to US crude (West Texas Intermediate) billion in 2018, which is approximately and other international benchmarks. 0.7 percent of Canada’s national GDP. Between 2009 and 2012, the average Insufficient pipeline capacity has re- price differential between Western sulted in substantial lost revenue for Canada Select (WCS) and West Texas the energy industry and thus imposed Intermediate (WTI) was about 13 per- significant costs on the economy as a cent of the WTI price.
    [Show full text]
  • Ice Crude Oil
    ICE CRUDE OIL Intercontinental Exchange® (ICE®) became a center for global petroleum risk management and trading with its acquisition of the International Petroleum Exchange® (IPE®) in June 2001, which is today known as ICE Futures Europe®. IPE was established in 1980 in response to the immense volatility that resulted from the oil price shocks of the 1970s. As IPE’s short-term physical markets evolved and the need to hedge emerged, the exchange offered its first contract, Gas Oil futures. In June 1988, the exchange successfully launched the Brent Crude futures contract. Today, ICE’s FSA-regulated energy futures exchange conducts nearly half the world’s trade in crude oil futures. Along with the benchmark Brent crude oil, West Texas Intermediate (WTI) crude oil and gasoil futures contracts, ICE Futures Europe also offers a full range of futures and options contracts on emissions, U.K. natural gas, U.K power and coal. THE BRENT CRUDE MARKET Brent has served as a leading global benchmark for Atlantic Oseberg-Ekofisk family of North Sea crude oils, each of which Basin crude oils in general, and low-sulfur (“sweet”) crude has a separate delivery point. Many of the crude oils traded oils in particular, since the commercialization of the U.K. and as a basis to Brent actually are traded as a basis to Dated Norwegian sectors of the North Sea in the 1970s. These crude Brent, a cargo loading within the next 10-21 days (23 days on oils include most grades produced from Nigeria and Angola, a Friday). In a circular turn, the active cash swap market for as well as U.S.
    [Show full text]
  • Redstone Commodity Update Q3
    Welcome to the Redstone Commodity Update 2020: Q3 Welcome to the Redstone Commodity Moves Update Q3 2020, another quarter in a year that has been strongly defined by the pandemic. Overall recruitment levels across the board are still down, although we have seen some pockets of hiring intent. There appears to be a general acknowledgement across all market segments that growth must still be encouraged and planned for, this has taken the form in some quite senior / structural moves. The types of hires witnessed tend to pre-empt more mid-junior levels hires within the same companies in following quarters, which leaves us predicting a stronger than expected finish to Q4 2020 and start to Q1 2021 than we had previously planned for coming out of Q2. The highest volume of moves tracked fell to the energy markets, notably, within power and gas and not within the traditional oil focused roles, overall, we are starting to see greater progress towards carbon neutrality targets. Banks such as ABN, BNP and SocGen have all reduced / pulled out providing commodity trade finance, we can expect competition for the acquiring of finance lines to heat up in the coming months until either new lenders step into the market or more traditional lenders swallow up much of the market. We must also be aware of the potential impact of the US elections on global trade as countries such as Great Britain and China (amongst others) await the outcome of the impending election. Many national trade strategies and corporate investment strategies will hinge on this result in a way that no previous election has.
    [Show full text]
  • Crude Oil Prices Also Affect a Wide Range of Other Non-Petroleum Forecasts Produced by STIFS
    Short-Term Energy Outlook Crude Oil Price Forecasts Independent Statistics & Analysis U.S. Department of Energy www.eia.gov Washington, DC 20585 Last Updated 2020 This report was prepared by the U.S. Energy Information Administration (EIA), the statistical and analytical agency within the U.S. Department of Energy. By law, EIA’s data, analyses, and forecasts are independent of approval by any other officer or employee of the United States Government. The views in this report therefore should not be construed as representing those of the Department of Energy or other federal agencies. U.S. Energy Information Administration | Short-Term Energy Outlook Crude Oil Price Forecasts i 1. Introduction In the Short-Term Energy Outlook (STEO), EIA’s forecasts for monthly average Brent and West Texas Intermediate (WTI) spot prices are calculated outside of the Short-Term Integrated Forecasting System (STIFS). The crude oil price forecast is one of the main determinants of the forecast for many of the petroleum price, consumption, and production variables within STIFS. Crude oil prices also affect a wide range of other non-petroleum forecasts produced by STIFS. EIA first formulates a forecast for Brent crude oil spot prices and then forecasts WTI spot prices by creating a forecast for the spot price spread between Brent and WTI. EIA considers three main inputs to determine its Brent price forecast: • A pooling model that provides a single Brent price series that is an average of five separate models • A linear regression using independent variables from the STEO forecast • Analyst judgment based on an understanding of global oil market dynamics and EIA’s forecast for supply and demand balances In sections three through five below, we discuss each of these inputs separately.
    [Show full text]