Remember those problems WTI crude had earlier this year with Cushing delivery? Remember how they cast a doubt on the grade’s position as a global oil benchmark?
Well it seems Saudi Aramco, the state oil company of the world’s top oil exporting nation, may have been more worried about the issue at the time than it originally made out.
In any case, on Wednesday, the state producer made abundantly clear what it thought of the benchmark. Here’s the press release from energy OTC pricing agency Argus (our emphasis):
28 October 2009 (Argus) — Saudi Aramco announced today that it will begin using the Argus Sour Crude Index (ASCI) published by Argus Media as the benchmark price for all grades of crude oil sold to US customers. Saudi Aramco has used WTI crude prices published by McGraw Hill’s Platts as the benchmark for crude sales to the US since 1994. The new policy will be in effect for January sales to the US.
That’s right, the world’s biggest physical oil exporter is planning from January onwards to price all its crude off a basket of sour American crude grades - not WTI.
Here’s some more detail:
This fundamental change in policy reflects the increased importance of the US Gulf coast sour crude market, in which both production and trading activity is rising sharply. Saudi Arabia exported over 1.5mn b/d of crude to the US last year, second only to Canada.
The Argus Sour Crude Index (ASCI) was launched in May this year to represent the daily value of US Gulf coast medium sour crude, based on physical spot market transactions. The daily ASCI price is the volume-weighted average of all deals done for three grades of crude combined: Mars, Poseidon and Southern Green Canyon. Saudi Aramco will publish a monthly price differential to a month’s average of the daily ASCI price published by Argus. Argus prices are already extensively used in the US midcontinent and Gulf coast crude markets to price long-term supply contracts.
“This move by Saudi Aramco shows that Argus’ approach to assessing crude prices is correct,” Argus Media chairman and chief executive Adrian Binks said. “Argus creates volume-weighted averages of the entire day’s physical market trading to create the ASCI. This clearly is the most transparent and robust method available for such active markets.” US Gulf output of 1.2mn b/d is expected to climb to 1.4mn b/d next year and 1.9mn b/d in 2013, boosting spot market trading volumes in the market and focusing attention on the US Gulf as a centre of price discovery. US sour crude continues to use WTI as a price reference, but responds quickly to global market dynamics whenever WTI becomes dislocated from world crude prices.
When high inventories at WTI’s trading hub of Cushing pushed down WTI’s value against other world crudes in the first quarter of this year, Gulf coast sour crude differentials to WTI responded to track other world sour crude prices.
This is a massive blow to Nymex and its WTI futures listing. Ultimately, their fear is that a new futures product will have to take its place when trading liquidity shifts into Argus’ WTI paper alternative due both to Saudi trades and to when traders begin calling for a new financial futures product with which to hedge.
But it is also a blow to Platts, the world’s premier OTC energy pricing firm and which dominates via its grip on the American crude market. What’s more, the fact that Platts launched its own Americas Sour contract this year may suggest more than a simple dislike of WTI on the Saudis’ part.
Related links:
‘WTI about as useful as a chocolate oven-glove’ - FT Alphaville
It’s all about Cushing – FT Alphaville