An Anatomy of the Crude Oil Pricing System
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- Bu səhifədəki naviqasiya:
- Figure 23: Volume and Open Interest of the October 2010 Futures Contracts (Traded During Month of August)
- Physical Liquidity of Benchmarks
- Shifts in Global Oil Demand Dynamics and Benchmarks
- Figure 24: OECD and Non-OECD Oil Demand Dynamics
- Figure 25: Change in Oil Trade Flow Dynamics
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Source: DME Website The introduction of the DME contract has changed the pricing mechanism of Omani crude. From its inception, it was clear that both a retroactive official selling price (OSP) and futures market-related price undermined the market function of price discovery. 96 Thus, it was a matter of time before Oman decided to change its pricing from a retroactive pricing system to a forward pricing system based on the DME contract. The OSP for Oman crude for physical delivery is calculated as the arithmetic average of the daily settlement prices over the month. For instance, the OSP for Oman crude for the month of June is calculated as the arithmetic average of the daily settlement of price over the month of June for delivery in two months i.e. in the month of August. The Government of Dubai has also ceased the pricing of its crude oil sales off its current mechanism and instead utilises DME Oman futures prices providing additional boost to the contract. Dubai and Oman however have been the exceptions so far. Despite Dubai‟s low physical liquidity, Platts Dubai/Oman assessments are still the preferred price benchmark used in the pricing formula for exports to Asia. This raises the question why other Middle Eastern producers have not been enthusiastic about adopting the DME Oman Crude Oil Futures contract as the basis of pricing crude oil. The futures market plays two important roles: price discovery and hedging/speculation or what is termed as risk management. Liquidity is crucial for the efficient performance of these two functions. Physical deliverability, which the DME tends to emphasize, is less important. In other words, deliverability is not a sufficient condition for the success of the DME Oman contract. In fact, physical deliverability can reduce the chances of the success of a futures contract if market participants have doubts about the likely performance of the delivery mechanism or if physical bottlenecks around delivery points result in some serious dislocations although the extensive use of the DME‟s physical delivery mechanism demonstrates confidence in its performance. Nevertheless, inability to increase trading liquidity while physical deliverability continues to rise may undermine the contract as the risk of physical delivery tends to rise, especially for those players that are not interested in physical delivery in the first place. If low liquidity persists, then the two functions of price discovery and risk management would be undermined and the contract would fail to attract the attention of market participants.
96 In a retroactive pricing system, the OSP applied to cargoes that have already been loaded. In a forward pricing system, the price for an oil shipment to be loaded say in May is determined two months before i.e. in March.
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Asian interest is crucial for the long term success of the contract as the Asia-Pacific region is the main importer of Middle Eastern sour crude oil. However, big Asian refineries haven‟t so far shown strong enthusiasm for the contract. As to the financial players/speculators, the DME futures contract can open new opportunities for trading and risk management. But speculative and hedging activity will not be attracted to a market with low liquidity. Market participants often prefer to trade only in the most liquid markets. The recent launch by CME of DME linked swap and option contracts is geared to providing new risk management tools in the hope of attracting more financial players and Asian refineries into the market. While Gulf oil producers do not hedge their oil production in the futures market, they have interest in a sour futures contract for export pricing purposes. Low liquidity however is likely to discourage the already very cautious Gulf oil exporters from setting their crude price against the DME futures contracts. So far, none of the big gulf producers such as Saudi Arabia, Kuwait, Qatar, and Iran have shown much interest in the newly established sour futures contracts. However, there is the temptation for some Gulf countries to shift part of the global oil trading activity to the region, which may induce a change in some oil exporters‟ attitude towards the contract. There is also strong interest in the success of the DME contract as evidenced by the heavy involvement of the CME Group and the various stakeholders. 97 Without this strong interest and support, the contract would have perhaps failed by now.
97 The DME is a joint venture between Tatweer (a member of Dubai Holding), Oman Investment Fund and CME Group. Global financial institutions and energy trading firms such as Goldman Sachs, J.P. Morgan, Morgan Stanley, Shell, Vitol and Concord Energy have also taken equity stakes in the DME (Source: Dubai Mercantile Exchange Website).
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8. Assessment and Evaluation Based on the above detailed analysis of the various benchmarks and their surrounding layers, it is possible to draw some broad implications which can be grouped as follows: the physical liquidity of benchmarks; the new dynamics of oil trade flows and its implications on pricing benchmarks; the nature of players in the market; the linkages between physical and financial layers; the process of price adjustment; and transparency in oil markets.
An interesting feature of the current oil pricing system is that markets with relatively low volumes of production such as WTI, Brent, and Dubai-Oman set the oil price for markets with much higher volumes of production in the Gulf and elsewhere in the world. Despite the high level of volumes of production in the Gulf, these markets remain illiquid, as there are limited volumes of spot trading, no forwards or swaps (apart from Dubai), no liquid futures market, and destination restrictions which prevent on-trading in chains. Furthermore, these markets are characterised by lack of equity diversification. While adequate physical liquidity is not a sufficient condition for the emergence of benchmarks, it is a necessary condition for a pricing benchmark‟s long-term success. Some observers have argued that in principle, there is not a certain level of production below which the integrity of the market is threatened. Before its substitution by WTI, the Alaskan North Slope (ANS) continued to generate market prices although the physical base was very narrow. The prices were derived completely from oil price reporting agencies‟ assessments of traders‟ perceptions about what the price would be if there were actual trade in cargoes. This argument however is unconvincing because confidence is unlikely to survive for long in markets with low physical liquidity. 98 As markets become thinner and thinner, the price discovery process becomes more difficult as oil reporting agencies cannot observe enough genuine arms-length deals. Furthermore, in thin markets, the danger of squeezes and distortions increases and as a result prices could then become less informative and more volatile thereby distorting consumption and production decisions (Pirrong, 1996). 99 A squeeze refers to a situation in which a trader goes long in a forward market by an amount that exceeds the actual physical cargoes that can be loaded during that month. If successful, the squeezer will claim delivery from sellers (shorts) and will obtain cash settlement involving a premium. One consequence of a successful squeeze is that the price of the particular crude that has been squeezed will rise relative to that of other marker crudes. Squeezes also increase the volatility between prices in different layers such as between the Dated Brent and the forward Brent giving rise to new financial instruments to manage this risk such as CFDs. Squeezes are made possible by two features: the anonymity of trade and the huge volume of trading compared to the underlying physical base (Mollgaard, 1997). After all, squeezes are much easier to perform in a thin market (Telser, 1992). This is in contrast with futures markets where the volume of transactions is quite large and thus there is less room for squeezes and manipulation, although futures markets are not totally immune. 100 Squeezes are also 98 The fact that ANS stopped acting as a benchmark suggests that there is a level below which integrity of the benchmark is threatened. 99 See for Instance, Liz Bossley (2003), Battling Benchmark Distortions”, Petroleum Economist, April. More recently, concerns about squeezes arose when one oil trader HETCO took control of the first eight North Sea Forties crude oil cargoes loading in February 2011 and two Brent cargoes with market observers describing such a move as a „trading play‟ intended to influence the spot market. Reuters (2011), „Oil Trader Takes Control of 10 North Sea Oil cargoes‟, January 18. 100 The challenge of the U.S. Federal trade commission to the BP Amoco-Arco merger was partly based on the fear that by controlling the physical infrastructure, the WTI futures market can be squeezed. The Federal trade commission notes that „the restriction of pipeline or storage capacity can affect the deliverable supply of crude oil in Cushing and consequently affect both WTI crude cash prices and NYMEX futures prices‟ (p.7). Then it states that „a firm that controlled substantial storage in Cushing and pipeline capacity into Cushing would be able to manipulate NYMEX futures trading markets and they enhance its own positions at the expense of producers, refiners and
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becoming less prevalent in jurisdictions where regulators enforce the laws against abuse of market power, and where those laws are clear. Also important is the design or the architecture of the market/contracts in which PRAs, in consultation with market participants, play a key role in determining its main features and structures and evolution over time. Regulators have also turned their attention to this issue where some observers consider that „the proposed spot-month position limit formula seeks to minimize the potential for corners and squeezes by facilitating the orderly liquidation of positions as the market approaches the end of trading and by restricting the swap positions which may be used to influence the price of referenced contracts‟. 101
So far the low and the rapid decline in the physical base of existing benchmarks have been counteracted by including additional crude streams in assessed benchmark. This had the effect of reducing the chances of squeezes as these alternative crudes could be used for delivery against the contract. Although such short-term solutions have been successful in alleviating the problem of squeezes, they should not distract observers from raising some key questions: What are the requisite conditions for the emergence of successful benchmarks in the most liquid market in terms of production? Would a shift to price assessment in such markets improve the price discovery process? Such key questions remain heavily under-researched in the energy literature and do not feature in the producer-consumer dialogue.
One of the most important shifts in oil market dynamics in recent years has been the acceleration of oil consumption in non-OECD economies. Between 2000 and 2009, demand growth in non-OECD outpaced that of OECD in every year (see Figure 24). During this period, non-OECD oil consumption increased by around 10.5 million b/d while that of OECD dropped by 2.1 mb/d. At the heart of this growth lies the Asia-Pacific region which accounted for more than 50% of this incremental change in demand during the 10-year period.
Source: BP (2010) traders‟ (p. 7) (United States of America Before Federal Trade Commission in the Matter of BP AMOCO P.L.C. and Atlantic Richfield Company downloadable from http://www.ftc.gov/os/2000/08/bparco.pdf
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„Proposed Position Limits for Derivatives‟, Statement of Bruce Fekrat, Senior Special Council, Division of market Oversight, CFTC, December 16, 2010. -2500 -2000
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The emergence of the non-OECD as the main source of growth in global oil demand has had far reaching implications on the dynamics of oil trade flows. This is perhaps best illustrated in the shift in the direction of oil flows from Saudi Arabia and Russia, the two biggest oil producers in the world towards the East. As shown in Figure 25, in 2002 Saudi Arabia‟s share of oil exports to the US and Europe amounted to 28.2% and 17.9% respectively. In 2009, these shares declined to 17.8% for the US and 10% for Europe. In 2009 Saudi Arabia abandoned its St Eustatius storage facility in the Caribbean which was mainly used to feed US markets and instead obtained storage facility in Japan to feed Asian markets.
Source: Barclays Capital, Oil Sketches, 23 April 2010
So far, Russia‟s exports have been heavily concentrated towards Europe to which in 2009 it exported around 7 mb/d compared with 1.17 mb/d to Asia Pacific. 102 These dynamics however are changing as Russia builds new infrastructure in an attempt to shift part of its oil exports towards the Far East. The inauguration in December 2009 of the first section of the Eastern Siberia Pacific Ocean (ESPO) pipeline represents a marginal but nonetheless important step in that direction. The first section of ESPO is a 2,757 km long pipeline connecting Taishet in East Siberia to Skovorodino in Russia‟s Far East, near the border with China. It has a capacity of 600,000 b/d is expected to grow to 1 million b/d by 2012, and potentially to as much as 1.6 million b/d in 2015. The second stage of the project involved linking Skovorodino to a new export terminal at Kozmino on the Pacific coast in order to supply some of the rapidly growing oil demand in Asia. China and Russia then agreed to construct an offshoot from Skovorodino to Daqing in China with a capacity of 300,000 b/d. It was completed by the close of 2010.
Such changes in trade flow patterns are likely to accelerate as the centre of consumption growth continues to shift from OECD to emerging economies. The EIA 103
predicts that between 2007 and 2035, oil consumption is expected to increase by around 24 mb/d from 86.1 mb/d to 110.6 mb/d with non-OECD accounting for almost all of the increase during this period. This shift in the dynamics of trade flows towards the East is likely to have profound implications on pricing benchmarks. Questions are already being raised as to whether Dubai, Minas and Tapis still constitute appropriate benchmarks for pricing oil in Asia given their low liquidity or whether new benchmarks are needed to reflect more accurately the
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BP (2010), BP Statistical Review of World Energy, June. 103
EIA (2010), International Energy Outlook 2010, US Energy Information Administration, Table A.5. 28%
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shift in trade flows. In this respect, a debate has already started on the suitability of ESPO to act as an Asian benchmark. 104
Since ESPO competes with Mideast crudes, so far ESPO has strengthened the Dubai benchmark. Since December 2009, Platts has been assessing the value of ESPO but as a differential to Platts‟ Dubai. In the longer term, ESPO has some of the features that may allow it to assume the role of a benchmark itself. The pricing point in Northern Asia is particularly attractive. ESPO is close to key refining centres in China, Japan and South Korea where the sailing time from the loading port of Kozmino to northeast Asia is just a few days, transforming the Asian market from a long haul to a short haul market. Furthermore, ESPO volumes are larger than many of the existing benchmark and could increase in the future. On the other hand, there is uncertainty about the volume that will be available for sale in the spot market as a considerable amount of it is sold on long-term basis or used in Rosneft refineries. There is also uncertainty about the quality of ESPO over time. Most importantly, for any benchmark to emerge, market participants should have confidence that the benchmark is not subject to manipulation which is yet to be proven. One must consider the legal, tax, and regulatory regime operating around any particular benchmark. WTI has the US government overseeing it and a robust legal regimen. Brent has also stable governmental oversight. Distrust of the Russian government is strong in many companies and hence the reluctance so far to support an ESPO benchmark. Nevertheless, if discontent with existing benchmarks intensifies, then ESPO could be one of the few options available for the industry to fall back on. Regardless of whether or not ESPO will eventually emerge as a benchmark, it is already having an impact on pricing dynamics in Asia. In a sense, ESPO is likely to become or has become the marginal barrel in Asia, displacing West African crudes in this role. Gulf suppliers have to monitor ESPO's performance very closely when setting their price differential in relation to Dubai to maintain their export competitiveness to Asia. This is likely to cause a decline in the size of the „Asian premium‟ over time. Yüklə 1,86 Mb. Dostları ilə paylaş:
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