Mideast Gulf - The gasoline rising star

Anu: Hi, everyone. So today we are here to talk about our latest gasoline price assessment, the Argus Middle East Gulf 92 Run gasoline price, also called MEBOB. I'm Anu Agarwal, VP business development for oil in Asia. And I have with me Will Harwood, who's the vice president of business development for oil and petroleum products based in London, and Aldric Chew, who's based in Singapore and leads our market coverage for oil products. So let me start with Aldric. Aldric, how large is the global gasoline market in terms of flows, inter-regional or, you know, give us a sense of this market?

Aldric: Sure. So I mean, in terms of gasoline flows-wise, exports-wise, it's about 5 million barrels per day. And in terms of flows-wise, we have across North America, supplying mainly the Latin America region. So you see a lot of U.S. Gulf cargoes going towards Mexico. And then for Europe, they're supplying mainly the West Africa and U.S. But of course, that volume from Europe to West Africa has been moving downwards a little bit from the startup of Dangote Refinery. And of closer to home for Asia Pacific it is more or less balanced with most of the Southeast Asian countries covered by the Northeast Asian refineries. By the same time, what we are seeing more often now is having some Asia Pacific supplies moving towards Latin America, like Mexico. So for South Asia, which is mainly India, the gasoline flows are moving towards the Mid East Gulf for blending.

And of course, I think something that's to note is that for Middle East, is the latest rising star. It's increasing its refining capacity recently and we are seeing some change in trade flows right now. But for now they're still mainly supplying Pakistan and, of course, African region. Africa itself is still net short. But what we know is that, you know, with Dangote starting up their mega-refinery there, it is becoming less short. And what more interesting now is we actually see some of these Dangote cargoes going towards Asia Pacific, especially towards the Mid East Gulf, and some even towards Malaysia and Singapore.

Anu: Got it. So it looks like a fairly global market with trade flows pretty much going in all directions. What are the major trading blocks or regions and what are the big or important pricing benchmarks or standards in this market?

Aldric: So for now, in terms of major trading region, we have Europe, which is,, of course the Argus MEBOB is the one that's a benchmark there. We have U.S. that mainly use the NYMEX RBOB futures. The Mediterranean is also one of the key regions, but it's slightly low in liquidity. And of course, last but not least, we have a big one in Singapore. And of course, now what we are expecting to do is, of course, to have MEBOB as the new benchmark for the Middle East. So the Middle East itself, as you know, is kind of the rising refining capacity of the world, and it is also exporting a lot more gasoline. And we do feel that that requires an independent benchmark and not linked to any other existing benchmarks.

Anu: Right. Interesting. So Will, maybe a question for you then. Why have we launched a Mid East gasoline assessment? I think Aldric has already referred to it, but why does it make sense to have this price, and why now?

Will: Aldric started it with by saying that the region really needs its own proper price, which people can use and can see the value of gasoline in the region. Traditionally, the way that the region has been assessed in terms of prices is that it takes the price from the Singapore market, which is a big market, and then deducts freight from that in order to get a price that would be the FOB or the price based in the Mid East Gulf. So it's trying to assess a price of one region by giving it a price minus the transportation costs of another region. And I think the region now is so important that it really does need something which is much more specific to the Mid East Gulf.

Anu: So what you're saying is it makes sense to have a price that reflects the demand supply fundamentals, the dynamics of trading in the Middle East region itself, the Middle East and Indian Ocean region itself, rather than based on another large market and being a kind of...you know, moving along that market, which may or may not be reflective.

Will: Yes, exactly. Obviously, if you have two centers, which you can say Singapore is one center, and the Mid East Gulf is another center, they can move together or they can move in opposite directions. And that mechanism of having a [inaudible 00:05:30] price minus freight just doesn't really adjust quick enough and can introduce some volatility, some...

Anu: Risks.

Will: ...unwanted volatility where you actually just want to say, what is the price in the Mid East Gulf? So that's really the basic reason why we think it needs this new price.

Aldric: And I think really just to add to that, so if you look at Singapore itself, it's mean destination for most of its cargos is towards Indonesia. So that's where the demand and supply fundamentals lie. And in terms of the Mid East Gulf, it's actually towards Pakistan, towards Africa, and at times towards Singapore, but most of the time it's towards South Asia and, of course, the African region. So really trying to tie both benchmarks together means that, you know, if Indonesia's demand were to increase, it doesn't make sense for the AGs price to increase in tandem, you know, if Pakistan, and of course Africa is not really buying that much. So I think separating both benchmarks is something that, it makes a lot of sense in this climate.

Anu: Got it. And who do you think...between, you know, Will or Aldric, who do you think will be really interested in seeing this price?

Will: I think it's relevant for everybody. I mean, gasoline is a global market. There's a global complex. The main hubs at the moment, let's say, are Singapore, Europe and the U.S. because that's where the main pricing signals come from, from the main pricing benchmarks and also from the main derivatives that are used. But everybody has some interest in understanding the other prices in other places. And this Middle East region has become so important that it needs to be clear. And there can be, again, a difference in price between two of those regions. And people can understand what the global complex is doing by reference to these prices.

Anu: So I guess in other words, the big traders, the big refiners based in this region, people who actually buy and sell gasoline, people who also need to hedge risks on these cargoes as well as, I guess, you know, I think people, the governments, and the regulatory bodies who look at gasoline price to the end consumer in each of these, you know, countries in the region, everybody would have an interest in seeing a fair price that reflects this region, I would say. Yeah?

Will: Yeah, because if somebody sees that prices go up strongly, then they can understand that it's specifically because of market dynamics in that region and can react to it. So whether that's they understand that now there's a possibility of an arbitrage in or on the country that it's actually going to attract too many barrels straight away. You know, everybody can see that as a market signal. It's really important, I think. And I think that's the case. It's not the case with a price which is derived from another region with a net back of freight...

Anu: Yeah, yeah, I agree.

Will: ...applied to it because then you can't really separate what's the commodity price, what's the freight volatility, and what would be the signals for the supplier region as well.

Anu: Dynamics of this region. Agree. The interest...

Aldric: [crosstalk 00:09:36]

Anu: Aldric, go ahead.

Aldric: Sorry, Anu. Sorry, just to add to that. So I mean, what Will mentioned about how the net back method doesn't really work as well. And I think one key thing that we can see here is that during our AOM trading the past few days, we actually noticed that the bits that are placed in the platform has really been, you know, almost like $1, $2 above the usual net back price, which basically means that the market should be even higher than the net back value. And people are putting their money where their mouth is by placing a bid that is higher than value.

Anu: One of the interesting things is that we have launched this price, the assessment comes through bids and offers and trades initiated on the Argus proprietary electronic platform called Argus Open Markets. So Will and Aldric, what are the advantages of assessing prices through such an electronic platform?

Will: Yeah, the main advantages really are the fact that it's very precise, it's very transparent because you see the bids and offers on the screen. And it's set up with a methodology that it's quite a short period of time because we have that the assessment is made on because we have a methodology that it's an outright price, so that outright price can move with the rest of the global oil complex. And it means that everybody sees the same thing and has the same opportunity to react to it. And we have, in one place, a very strong set of price signals, which we then use to make the assessment.

Aldric: Actually, just want to add as well. So just keep in mind that this AOM platform has been...I mean, we basically did months of research with market participants. We spoke to all the NOCs or most of the NOCs and a lot of the key traders to really understand what is the way as of which they are used to trading. And I think that's something that we are trying to implement in the AOM as well. So even the guardrails that we put in place, even the increments that we have, it is all through a lot of research and a lot of consultation with the market itself.

Anu: Okay. So Aldric, what time does this platform...what time is it open, when does it run, and how's the interest so far, and do we see this growing?

Aldric: Sure. So it opens at 1:30 Dubai time and then it closes at 2:00 p.m. Dubai time. But the assessment itself starts only from 1:45 to 2 p.m. So, so far, we started on the 20th of August, and every single day we had activities and, of course, by very strong regional players. And I think even during the UK bank holiday, which I believe was on the 25th of August, there was also activity on the day itself, which is very encouraging. And I think something that we have to note is that there has been a wide appreciation that the region needs something like this, and people have been coming on board and there are more and more people coming on as well.

Anu: Right. Okay. So this is all very encouraging. Aldric, can I check with you, where can we see, where can our subscribers and clients see the MEBOB price, where is it published?

Aldric: Sure. So it's published in two reports. One is APPR, which is the Asia Pacific Products Report, and it's also in the MGO report, which is the Argus Mid East Gulf and Indian Ocean Report. And of course, we also have it on Argus Direct. And what we are working on right now is a workspace for MEBOB itself. So that will include really news analysis on the Mid East Gulf specifically, and then it will include all the 95, 92 spreads, any oxy, non-oxy spreads for the Mid East Gulf specifically, and of course, all the MEBOB prices can be found there as well.

Anu: So thanks very much, Will and Aldric. This is a very interesting discussion and I know that we will be continuing to talk about it in the coming weeks. If you want to know more on any of the points related to MEBOB, please feel free to write at oil-products@argusmedia.com. Thanks, everyone.