Platts considers new tweaks to Brent oil benchmark

Wed Oct 9, 2013 6:48am EDT

* Reform this year aimed at increasing liquidity

* Critics say Forties still playing too prominent a role

* Platts proposes adjusting quality premium calculation

By Alex Lawler

LONDON, Oct 9 (Reuters) - Oil pricing agency Platts is discussing fresh changes to strengthen the global oil benchmark Brent, responding to criticism that its previous reform failed to boost liquidity as much as hoped.

The reform arises as regulators have stepped up scrutiny of a wide range of benchmarks across financial and commodity markets, especially after the Libor-rigging scandal exposed manipulation of the interest rate-setting benchmark.

Brent is used to set the price of billions of dollars of daily oil trade though a 25-day forward market for Brent, Forties, Ekofisk and Oseberg (BFOE) crude cargoes from the North Sea, physical benchmark dated Brent and Brent crude futures .

In a bid to boost liquidity, Platts began to apply quality premiums to two better-quality crudes - Oseberg and Ekofisk - from June 2013 to encourage delivery of these into contracts.

While generally supporting the changes, some traders and analysts say that despite them, Forties continues to set the value of dated Brent most of the time and the quality premiums may be set using too long a time span of historical data.

"We indicated at a public forum in mid-September that we are opening discussion on reviewing the system," Jorge Montepeque, Platts editorial director, market reporting, told Reuters.

The quality premiums are announced each month by Platts, a unit of McGraw Hill, and are paid by the buyer to the seller for the delivery of a better-quality cargo.

At present, Platts bases the quality premiums on 50 percent of the net price differences between Oseberg and Ekofisk and the cheapest of the four BFOE crudes, and draws on two months of price assessment data.

Montepeque said Platts was discussing shortening the time span to one month and using 60 percent of the net price difference rather than 50 percent.

A North Sea trader said less reliance on past data would be a good thing.

"Setting a spot quote using historical data is a little questionable," the trader said, declining to be identified due to company policy. "That makes hedging much trickier."

Dated Brent is set by the cheapest of the four crudes, usually Forties. At present, say some analysts, holders of the other two grades do not have an incentive to deliver them, making Forties too prominent.

"The introduction of quality premiums into the 25-day BFOE contract has not solved the problem of there only ever being Forties cargoes," said Liz Bossley, of consulting firm Consilience and author of a new guide to oil trading.

"We are not seeing producers of Oseberg and Ekofisk having an incentive to deliver into the contract at the moment," she said, partly due to the time lag in the quality premium calculation.

The reform led to an industry debate because one of the biggest North Sea traders, Royal Dutch Shell initially proposed different trading terms to those used by Platts.

This posed a risk of rival standards, although the industry - mostly exposed to Platts prices and methodologies - later settled on a modified Platts proposal.

Asked for its view on how the changes were working, Shell declined to comment, as did BP Plc, which backed Shell's initial quality premium proposal.

Thomson Reuters, parent of Reuters news, competes with Platts in providing news and information to the oil market.

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