The Crude Report: Dated's U-turn

Author Argus

A U-turn on plans to transform the Dated Brent benchmark has left its future more uncertain than ever.

Will it be FOB or CIF? How long will it be until some type of decision will be made? How long past July 2022 will these changes take place?

In this episode of The Crude Report, Argus Crude editor Michael Carolan gives more detail on the U-turn and what other questions remain looming.



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Transcript

Jessica: Hello and welcome to The Crude Report, Argus' podcast series on global crude oil markets. This is Jessica Tran for Argus Media.

It goes without saying that there is definitely a buzz in the oil market air about Dated Brent as this price is often used not only in crude oil markets but also sometimes flows into LNG and some refined products pricing as well. The recent announcement on the price's structural change fluctuating back and forth a bit on the specific changes and if and when they could happen have put the future of Dated Brent a little in question.

With me today to get us caught up on where we are now as of the week of March 15th, 2021 is Michael Carolan, editor for the Argus Crude report. Hi, Michael. Thanks for joining us.

Michael: Hi, Jessica. Thanks for inviting me.

Jessica: I understand there have been further developments in the proposed transformation of the Dated Brent benchmark. Is that right?

Michael: It is, yes. Effectively, there's been a U-turn by price reporting agency Platts. They said in late February they were gonna add WTI into the basket of crude underpinning Dated Brent. But more importantly, they said they were gonna change Dated Brent from an FOB to a CIF benchmark. So rather than North Sea cargoes trading at the point of loading, they would trade at the point of delivery at Rotterdam and therefore include the cost of freight. Now most of the market expected the inclusion of WTI and a large of the market accepted that change. But the change from FOB to CIF was not expected and it was widely rejected. Last week, Platts backed down following this industry backlash and said it was gonna defer the changes and would instead have more consultation with the industry.

Jessica: So it sounds like it's not the end of the matter.

Michael: Unfortunately not. And all we know now is there will be no change to the CIF benchmark next summer as originally planned. Other than that, everything is uncertain. All options are now back on the table and there are a lot of options. Nobody now has any idea what Dated Brent will represent beyond next year, least of all Platts.

Jessica: So what are the feasible options at this point?

Michael: Well, Platts said last week it still favors adding WTI to the basket and changing Dated Brent to a CIF mechanism. So those two ideas remain on the table, but it said it's willing to listen to alternatives. Now, the move to a CIF benchmark is clearly the most disruptive and raised the most objections. Such a change would introduce a disconnect between Dated Brent and Ice Brent Futures, which is a FOB value. And at the time, this drove a spike in the price of dated to frontline swaps. Platts and the Ice exchange both had to launch new instruments to enable the DFL markets to continue to function.

Now the associated change to the forward contract to a CIF mechanism has even less likely heard of success. Most of the participants in North Sea that we spoke to dismissed the idea as unworkable. There was one proposal by a trading firm, Trafigura actually, that would involve the issuance of loading programs for WTI crude at US Gulf coast. And this would help maintain the FOB nature of the forward market. That idea has gained some traction but probably not enough to get the support of the whole industry.

We have to remember the addition of WTI into the Dated mechanism is still fiercely opposed by sections of the industry. Many still favor the addition of local grades such as Norway’s Johan Sverdrup, for instance. Now that's a heavier and sourer crude, so there would have to be quality adjustments made to that and it would potentially end Dated Brent's role as Europe's light sweet crude benchmark. Such a transformation would struggle to gain industry support.

Jessica: And it's always harder to find a solution that everybody will be happy with, but what specific considerations does Platts have to consider?

Michael: Yeah, well, I mean, like I say, this is the problem. If you get 10 North Sea traders in a room together, you'll get 10 different solutions to the Dated Brent problem and fierce objections to every one of them. And of course, antitrust laws mean you can't get 10 North Sea traders in a room together. So Platts needs to find a way to build a consensus. In the past, it's been able to just forge ahead with changes to Dated Brent such as adding more grades such as Troll or introducing quality adjustments which it has on Ekofisk, Troll, and Oseberg. And it's been able to do this with the support of just a few major North Sea participants. And the rest of the industry, even if they had objections would eventually accept these changes and go with it. But that has now become a lot more tricky. The turmoil of the last few weeks after Platts' original announcement means that by its own admission, Platts has now lost the trust of the industry and it will need widespread support to make any of these proposed changes stick.

Jessica: And I know you and the Argus crude team often speaks with market participants. I mean, from their point of view, what do they feel needs to happen?

Michael: Well, basically, the industry needs to decide what is Dated Brent for, should it reflect the price of North Sea crude or should it reflect European refining economics. It's hard to see how the benchmark can do both of those things. We need to decide do we want a system of such complexity that only a handful of traders in London and Geneva actually understand how it works. It could be that these are intractable problems. The world may start to look elsewhere for ways of pricing global crude.

There have been moves towards using futures prices such as Ice Brent or the new Murban contract as physical benchmarks. And of course, Argus itself publishes a number of US prices which might be seen as more suitable and more importantly, more stable than Dated Brent. But a solution for Dated Brent is still needed in the short-term. And the clock is ticking. Platts itself expects the amount of crude underpinning the benchmark to drop below one cargo a day next year. Now this is a threshold that the firm itself has described as critical. So we will see changes to Dated Brent in the next year or so, but we don't know how much of the industry will be on board with those changes.

Jessica: And speaking of Argus' own assessments, what plans does Argus have for our North Sea Dated price that also reflects, you know, the North Sea market?

Michael: Well, we publish an equivalent price to Dated Brent that we call North Sea Dated and the methodology for both prices is almost identical. In the last few weeks we've been reassuring the market that North Sea Dated will remain a FOB price, and that is still our position. But we too will need to discuss with the industry what changes are needed. We have always tried to affect how the industry actually operates rather than how we think it should operate. And that will remain our aim in the talks we have over the coming months.

Jessica: Okay, great. Thanks for your update on the latest Dated Brent developments. Since there's still a lot up in the air, I'll also thank you in advance for your willingness to join us again for future podcasts to update us all as we go.

Michael: I'm sure I'll be there, Jessica.

Jessica: For more information on the Argus North Sea Dated assessment, which is available in our Argus Crude service, you could find more information on that assessment at www.argusmedia.com. Thanks for tuning in this week and we look forward to you joining us on the next episode of The Crude Report.

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