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Aramco switches from WTI benchmark

Sam Fletcher
OGJ Senior Writer

Starting with its January sales program, Saudi Aramco, national oil company of Saudi Arabia, will switch from West Texas Intermediate to an index of Gulf Coast sour crudes as the benchmark for pricing its oil for sale in the US market.

Aramco will use Argus Media Ltd.’s Argus Sour Crude Index (ASCI) in pricing its Extra Light, Arab Light, Arab Medium, and Arab Heavy crudes, which are heavier and have higher sulfur content than WTI. That index, launched in May, uses the volume-weighted average of daily spot sales of the Mars, Poseidon, and Southern Green Canyon crudes.

Aramco’s move is “more of an evolutionary smoothing out of distortions, rather than…a dramatic change in the dynamics of the US crude market,” said Paul Horsnell at Barclays Capital in London. He sees it as “a form of insurance” against volatility caused by WTI price dislocations. Usually, Gulf crudes and WTI prices move “pretty much in line.” However, distortions caused by logistical or inventory constraints at its pricing point in Cushing, Okla., can dislocate WTI prices away from North Sea Brent and US gulf crude prices.

Aramco’s switch to ASCI sparked speculation other exporters of sour crude to the US may change over. But the move should not be interpreted as a rejection of WTI’s general role as market leader, Horsnell said.

“US gulf crudes tend to be assessed in terms of differentials to WTI, rather than as separate centers of independent price discovery, and we expect that to continue,” he said, adding, “Should an active OTC or futures market based on ASCI eventually arise, then the dynamics could change. However, establishing futures contracts based on delivered US gulf sours has proved very problematic in the past and is still very far from an inevitable development. Indeed, the current regulatory climate is not exactly ideal for any innovative development of new OTC or formal exchange based oil derivatives.”

The New York Mercantile Exchange has tried to establish a benchmark US gulf sour crude contract for trade since the early 1990s. Now NYMEX officials say they will launch a futures contract based on the Argus index before Aramco makes its change.

Saudi pricing formulas
For more than 20 years, Saudi crudes imported into the US on term contracts have been priced against a benchmark averaged 50 days after the time of loading and adjusted by a differential declared in advance for the month plus freight cost adjustments. “Until the January 1994 sales program, the marker used was Alaskan North Slope (ANS) as delivered into the US gulf. After a period in which holders of term contracts grew dissatisfied with the dynamics of ANS prices, WTI forward prices were introduced instead,” Horsnell said. “Given that past changes in the mechanics of the formula have primarily been the result of representations from term contract holders, it seems safe to see the change as reflecting a wide discontent within the US oil industry about the performance of WTI during those periods of dislocation.”

At its inception, ASCI said it will use WTI as a basis for its price assessments, with the WTI basis following the NYMEX light sweet crude contract.

Bloomberg News reported Mars Blend crude for December trading at a $3.10/bbl discount to WTI at Cushing in late October. Discounts for Poseidon and Southern Green Canyon crudes were $3.05 and $3.95, respectively. On the US spot market, WTI at Cushing was down $2.87 to $77/bbl Oct. 30 in lock-step with the December futures contract on NYMEX. Brent for the same month lost $2.84 to $75.20/bbl. The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes, including Saudi Arabia’s Arab Light, was down 38¢ to $75.56/bbl that day.

“To some extent the growth in prominence of ASCI is as much a challenge to Brent as it is to WTI,” Horsnell said. “Before, Brent was the only benchmark that had a claim to being the best gauge for Atlantic crude pricing during periods when the US Midcontinent pricing decoupled. Now there is another potential claimant, albeit one that so far lacks the panoply of OTC and derivative markets and liquidity that are necessary to lay a claim to being a center of price discovery rather than one of price reflection.”

In Europe and the Mediterranean, Aramco prices its crude against the Brent-weighted average posted by the International Petroleum Exchange in London. In Asia, it relies on the average of two Persian Gulf benchmarks of Oman and Dubai grades of crude.

(Online Nov. 2, 2009; author’s e-mail: samf@ogjonline.com)


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