London, 3 December (Argus) — The oil industry's centre of gravity has moved to Asia-Pacific. Nuances of Chinese policy have disproportionate effects on oil prices, because the country is such a large part of incremental demand. India's new refineries, and those in other Asia-Pacific countries such as Vietnam, add to the weight of east of Suez buying power in crude markets. And the region's products markets are huge, growing and diverse, as countries such as Indonesia and even Mideast Gulf crude exporters become swing product importers.
But even as oil markets are increasingly subject to the pull of Asia, the region fails to produce appropriate price indexes. Crude exported east from the Mideast Gulf is priced at differentials to official prices or under term contracts with Dubai-Oman as a benchmark. Yet the Dubai-Oman spot market suffers from a lack of underlying production and few participants. Dubai swaps markets are large, but focus on spreads — inter-month Dubai, or the exchange of swaps for futures (EFS) of Dubai against Ice Brent.
The EFS market links Dubai prices with the liquidity of Brent, and arbitrage between the two helps ensure that Dubai-related pricing never dislocates too much from the rest of the market. But regional oil futures have failed to match up to those in London and the US. Dubai exchange DME's Oman futures contract has low volumes, and is used largely as a physical delivery mechanism for Oman crude. Buyers such as Japanese refiners are reluctant to trade DME Oman, and while the contract is used to set official Oman and Dubai prices, no other regional exporter yet uses it.
Products in Asia suffer from many of the same weaknesses regarding suitable benchmarks as crude markets. Gulf product prices are still based on Singapore assessments with freight netbacks, as if the region only exported. Yet many Gulf countries now import diesel and gasoline. This illogical system will only end if products trading in the Gulf moves to a spot basis, allowing outright prices to be identified for key marker grades at specified locations. Saudi oil adviser Ibrahim al-Muhanna called for a Gulf trading centre over three years ago, but progress is painfully slow.
The Gulf's dependence on inappropriate Singapore product benchmarks is mirrored across the Indian Ocean and thousands of miles away in China. Indian product cargoes usually move west, but the country's prices are still chained to Singapore in the east, as if India was still mainly an importer. In east Asia, a system of benchmarks based on products prices assessed at a key Chinese refining centre appears more sensible than basing everything on Singapore cargoes, which suffer from poor liquidity, a low number of market participants and circular methodologies.
China's position as the most powerful buyer in world oil markets is not matched by influence on benchmarks. Institutional factors — tax, law, bureaucracy, administered fuel pricing — there and elsewhere in Asia, Singapore excepted, do not support market indexing. For instance, Beijing cut electricity grid supplies from September to meet energy efficiency targets at the end of the 2005-10 five-year plan, causing a jump in the use of diesel-fired generators, just as in 2004. This has helped take crude prices above $80/bl from October as Chinese refiners boost runs to make diesel.
Paradoxically, the rise of China has coincided with a shift in price references for some Asia-Pacific grades to Dated Brent — based even further from the market than Dubai-Oman. Growing Chinese imports of Russian oil may help provide the answer. The East Siberia-Pacific Ocean pipeline delivers cargoes at the Pacific, and crude direct to China along a pipeline spur. A spot market is developing, but is still tied to Dubai-Oman pricing. Buyers and sellers in Asia need to make a declaration of pricing independence.
If you would like to see more high quality analytical commentary on key oil industry developments and pricing and trading behaviour, request a free trial of Argus Global Markets.
Send comments to feedback@argusmedia.com
sc/jc 2.1
If you would like to review other ArgusMedia.com content options, request more information about Argus' energy news, data and analysis services.
Copyright © 2010 Argus Media Ltd - www.ArgusMedia.com - All rights reserved.
