ESAI, Energy Security Analysis Inc, is a Massachusetts-based energy consultancy. The opinions expressed are those of ESAI.
Nov 11 - The decision to migrate the Saudi crude oil price formulas from Platts’ WTI benchmark to Argus’ Americas Sour crude Index (ASCI) was a logical step that has been well documented in the press.
While ESAI agrees that this development will have little short term impact on the WTI benchmark, there will undoubtedly be wider implications for crude oil pricing in the long term. In a note to clients last week, ESAI laid out the sequence of events that might eventually lessen the impact of paper trade on oil pricing.
It is likely that Saudi Arabia (with one million b/d of exports to U.S. so far this year) will not be the last major sour crude exporter to shift to the ASCI. Iraq (450,000 b/d), Kuwait (200,000 b/d), and the UAE (125,000 b/d) could make similar changes in the coming months.
It is also possible that Pemex (1.1 million b/d) and PdVSA (1.2 million b/d) could move toward the ASCI or at least the ASCI-Maya spread would be followed more closely. These changes would mean a significant volume of physical crude could be priced off of ASCI.
Although the ASCI price is based on differentials of its component crudes to WTI, this development does create more of an arm’s length relationship between sour crude pricing and WTI. Most importantly, if more countries follow, the quality differential between WTI and imported sour crude will be shaped more by USGC fundamentals and less by sometimes arbitrary government price formulas. This will also raise the profile of Mars and Poseidon, the two major components of the ASCI contract.
Another important development is the announcement that CME (NYMEX) will create one or two futures contracts tied to the ASCI price or one of the sour crudes. While NYMEX’s earlier USGC sour futures contract failed, the potential for much more physical sour crude tied to a specific USGC quotation like ASCI could help the success of a new contract.
CME has indicated that the first contract will only have cash settlement but a successor contract could also allow physical delivery.
The development of a futures contract begs the question of whether ASCI (or its component crudes) could ever become spot market benchmarks, traded on their own right, and not as simple differentials to WTI. That seems unlikely today, but even if there is no crude price that could ever be completely divorced from either WTI or Brent, the growth in physical trade tied to this marker and the existence of a futures contract to facilitate hedging could gradually move USGC sour crude pricing in that direction.
If that did happen, then we could see a gradual reduction in the financial influence on crude pricing. WTI would be the American benchmark more shaped by the dollar and other capital market developments and ASCI (or the like) would be the American benchmark more shaped by developments in sour crude oil supply.
The spread between the two would indicate more than just the geographic and quality differences between them. Moreover, even if financial trade moves to a USGC sour crude futures contract, the ability to deliver seaborne crude on the contract would give the physical market more power to discipline a paper rally than WTI at Cushing allows today.
Finally, by not pricing directly off WTI, the sour crude exporters of OPEC can say that their production decisions are not directly influencing WTI, but rather sour crude pricing, giving them some cover when and if WTI prices on NYMEX take off.
Obviously this scenario would take a long time to unfold and would require many things to happen in sequence, but it would certainly make us look back on this Saudi decision as a very important development.
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