Platts, the oil pricing service, has unveiled a significant revision to the way it assesses the Brent oil pricing benchmark, angering traders who say the change is being pushed through too quickly.<\/p>\n
Brent Crude Pricing<\/strong><\/p>\n As much as 70 percent of the world’s physical crude is priced off the Brent benchmark, called Dated Brent by traders. It also underpins the futures market, which companies use to hedge oil price risks and investors use to bet on the future price of oil.<\/p>\n But the flow of crude from the aging North Sea oil fields that form the basis of the Brent benchmark has dwindled in recent years. The lack of liquidity has increased the risk of manipulation, with traders sometimes able to squeeze the market and bid up the price of Brent by buying up all available cargoes.<\/p>\n Temporary factors in the region have also tightened the market. Last month, the North Sea Forties pipeline was shut down after an unexploded German mine from World War II was discovered nearby. That led to delays and cancellations of shipments of Forties, the largest grade of crude contributing to Brent.<\/p>\n Such supply problems have contributed to a big increase in the gap between the prices of Brent and US WTI futures, with the premium reaching a record $27 a barrel earlier this month. Brent crude futures were trading at $112 a barrel Friday while WTI was at only $88 at barrel.<\/p>\n Platts Brent Price Revisions<\/strong><\/p>\n Platts assesses the price of Brent by looking at contracts from 10 days to 21 days before the oil is loaded for delivery. That 12 day period will be expanded to 16 days, beginning on 6th January 2012.<\/p>\n Platts said adding four more delivery days would allow the assessment process to potentially capture more than 30 percent of additional supply, which would create greater liquidity for the benchmark.<\/p>\n Jorge Montepeque, Platts’s global director of markets reporting, said that in the longer term, the company was considering extending the date range further. It was also mulling adding other grades to increase Brent’s liquidity, from the North Sea and beyond.<\/p>\n The changes are important for companies such as oil producers and refiners which hedge their exposure to the physical oil market through futures and options. If the price of the physical Brent differs from Brent derivatives because the use of different methodologies, their hedging strategies could fail.<\/p>\n Royal Dutch Shell, one of the biggest participants on the Brent market, took the rare step of sending a public letter to Platts last month urging the pricing agency to delay any change. In the letter, the oil company, said that the adjustments in the physical and derivatives Brent contracts should be concurrent and said they should not be implemented until the first quarter of 2013.<\/p>\n Other industry participants took the same view, urging Platts to delay the overhaul, executives said. Some traders, however, took the view that Platts needed to move quickly and ICE was the one that should accelerate its plans to alter the methodology of the Brent futures contract.<\/p>\n “We believe these changes are necessary to maintain the quality of the Brent price assessment. Recent events in the market, including disruptions to the Forties pipeline system and shortfalls in cargo deliveries, show clearly that timely action is needed to maintain the strength of the physical benchmark. Four more delivery days will allow the assessment process to potentially capture more than 30% of additional supply.” said Dan Tanz, vice president of editorial, Platts.<\/p>\n For more information and background on the pending changes, Platts has posted a webinar on the proposed changes to its Dated Brent and cash Brent assessments on its website. The webinar is available for download at the following link: Platts Oil Price Changes 2012<\/a><\/p>\n<\/p>\n