Market still split on addition of WTI to Dated
A decision on whether to integrate US crude WTI into Europe's crude benchmark is due in the coming days but opinion is divided on the merits of such a move.
Price reporting agency Platts this month concluded a consultation on its plans to include US crude WTI in its Dated Brent index from March 2022, with the results expected to be unveiled next week. Platts and Argus publish near-identical North Sea benchmarks — Dated Brent and North Sea Dated, respectively. But the North Sea's dwindling benchmark production has made them less reliable as indicators of the price of light sweet crude in Europe. The rising amount of WTI crude coming to Europe has been seen by many European refiners and international crude trading firms as a better indicator of Europe's crude price.
The addition of WTI to the existing basket of five North Sea crudes — Brent, Forties, Oseberg, Ekofisk and Troll — will shore up the declining volumes underpinning the benchmark. Argus has published a "New North Sea Dated" price for the past two years that incorporates a delivered-Rotterdam WTI price — adjusted for freight and timing to a virtual North Sea fob price.
Reaction to Platts' proposals has been mixed. The price of WTI in Europe is often a function of domestic US fundamentals rather than European refining economics, some firms say. And while the quality of WTI and existing North Sea benchmarks are broadly similar, the way the crudes trade is fundamentally different. North Sea crudes trade far more promptly than WTI in Europe, with most WTI trade occurring outside of North Sea Dated's 10-day to month-ahead assessment period.
North Sea grades also trade on a fob basis, while WTI trades on a delivered basis. Platts' solution is to launch a WTI fob Scapa Flow assessment. This fob WTI assessment will effectively be a delivered-Rotterdam WTI assessment with the cost of freight between Scapa Flow and Rotterdam removed. No WTI has ever transferred ship to ship at Scapa Flow, an area off northern Scotland used for transferring North Sea crudes from one vessel to another.
Virtual slots
Platts has said it will publish a "virtual loading programme" for WTI at Scapa Flow — using "loading dates" supplied by shippers of US crude to Europe. But what this means in practice is unclear. Sellers are unlikely to ship US crude to Scapa Flow for the purpose of a loading programme unless they are confident there will be a buyer. This "loading programme" is an aspect of the proposals that has raised the most objections. Without a loading programme, WTI cannot be treated the same as the other five grades in the basket. A bid for particular loading dates is effectively meaningless if there is no cargo there to load.
Critics also point out that the inclusion of WTI could have the effect of lowering the price of the benchmark. Argus data suggest that in the last two years, WTI was cheaper than the five benchmark grades, after freight, 45pc of the time. This would have resulted in a lower North Sea Dated price, which is unacceptable to some in the market. Platts' suggested solution is to keep the WTI fob Scapa Flow price artificially high by subtracting only 60pc of the freight difference from the cif Rotterdam WTI price rather than 100pc, or even 80pc — as it does for similar North Sea conversions. Argus data suggest that this would have left WTI as the cheaper grade only 16pc of the time in the past two years. But critics question why WTI would be included in the benchmark if there is a need to artificially inflate its price to ensure that it does not set the benchmark as the lowest priced of the crudes.
Some see Norway's Johan Sverdrup crude as a better fit. It can trade on a fob North Sea basis and loading programmes are issued. But it is a heavier grade than the other benchmarks, and generally trades at a discount to them.
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