An Anatomy of the Crude Oil Pricing System
Figure 7: Falling output of BFO
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- Bu səhifədəki naviqasiya:
- Table 5: API and Sulfur Content of BFOE Crudes
- The Layers and Financial Instruments of the Brent Market
- Figure 8: Trading Volume and Number of Participants in the 21-Day BFOE Market
- 2009 2010 Arcadia
- Chevron
- Glencore
- Hetco
- Morgan Stanley
- Phibro
- Shell
- Total
- Trafigura
- 159,386 369,681 483,828 252,979 159,383 369,682 483,827
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Figure 7: Falling output of BFO
Source: Joel Hanley, Assessing the Benchmarks, Platts Presentation, January 31, 2008. In 2007, a new grade, Ekofisk, was added to the complex which led to the creation of the current benchmark known as BFOE, though it is still commonly referred to as Brent or North Sea. Ekofisk is a mixture of crude oil produced from different North Sea fields and is transported to the Teesside terminal in the UK. The bulk of BFOE output is traded on the spot market or transferred within integrated oil companies where only about one out of seven BFOE cargoes is sold on long-term basis. 56 This feature combined with the highly diversified ownership gave rise to an active trading activity around BFOE. The inclusion of this new stream increased the physical base of the benchmark to around 45 million barrels a month in early 2007 but since then it has been in gradual decline. Production of BFOE is expected to decline to less than 1 million b/d by 2012. As noted by Platts (2010a:3), further changes to the benchmarks can‟t be ruled out, especially „if production of the key grades is deemed too low or if their qualities were to deviate significantly from the norm‟. In fact such a change might occur sooner rather
56 Argus (2010), Argus Guide to Crude and Oil Products Markers, January. 39
than later. A recent article warns that „unless the contract is enlarged, it faces the risk of serial squeezes and distortions‟. 57
Given that these various grades are not of similar quality as shown in Table 5 below, the widening of the definition of the North Sea benchmarks has implications on the price assessment process. In particular, the start-up of the Buzzard field in 2007 increased the viscosity and the sulfur content of Forties Blend making Forties the least valuable among the various crudes in the BFOE benchmark. Since any of the four varieties can be delivered against a BFOE contract, sellers often tend to deliver the cheapest grade and hence it is Forties that sets the price for the BFOE benchmark. 58 This problem becomes more acute during periods when other fields in the Forties system are shut down for maintenance. As a result of including the Buzzard stream, Platts had to introduce a quality „de-escalator‟ in July 2007 which applies for deliveries above the base standard of 0.60% sulfur: the higher the sulfur content, the bigger the discount that the seller should give. Currently, a de-escalator of 60 cents/barrel applies for every 0.10 per cent of sulfur specified above the base standard. Prior to this „innovation‟, the market was not sure on how to deal with the sulfur issue and in some periods in 2007 there were no trades in the Platts window. 59
changes to its pricing assessment process had paralysed the market. 60
Table 5: API and Sulfur Content of BFOE Crudes
Forties Before Buzzard Buzzard
Brent Oseberg
Ekofisk API
44.1 32.6
38.1 37.7
37.5 Sulfur Content wt. 0.19
1.44 0.42
0.23 0.23
Source: Bossley, L. (2007), Brent: A User‟s guide to the Future of the World Price Marker, London: CEAG, Table 5.
The Layers and Financial Instruments of the Brent Market Around the Brent/BFOE physical benchmark, a number of layers and instruments have emerged, the most important of which are: Brent Forwards, Contract for Differences (CFDs), Exchange for Physicals (EFPs), and Brent futures, Brent options and swaps. Some of the instruments such as futures are traded on regulated exchanges such as ICE while others such as swaps are traded bilaterally over-the-counter (OTC). Nevertheless, these layers are highly inter-linked and are essential for the risk management and the price discovery functions.
In the Brent complex, data about the different layers such as the volume of trading, the number of concluded deals, the composition of participants and the degree of concentration are not publicly available. Oil PRAs are under no legal obligation to report or publish such data although oil trading data gathered by PRAs are made available to subscribers at a price. This section relies on data provided by Argus. While this is one of the best sources for data on the Brent complex, the data suffers from some limitations. There are no legal or regulatory obligations on participants in the Brent market to report their deals and thus the coverage depends on the willingness of participants to provide information to the oil
57 Kemp, J. (2011), Falling Output Imperils Brent Benchmark, Reuters, 19 January 2011. 58 For instance on May 25 2010, Forties was assessed at $67.57-67.59, Oseberg at $68.49-68.52, Ekofisk at $68.29- 68.32, and Brent at $68.02-68.05 by Platts. The BFOE or North Sea Light was assessed at 67.57-67.59, the same as the assessment of the value of Forties. 59 FT.com/Alphaville (2010), „Brent‟s Got Its Problems Too‟, September 2010. 60 Reuters (1997), Platts to modify new oil price system after turmoil, 19 June.
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pricing reporting agencies. This has a number of important implications. First, since there is OTC trade that goes unreported, the volume of market activity reported by Argus is likely to be a fraction of the total volume of trade conducted in the various Brent layers. Nevertheless, it is representative of the market activity and hence any proportions based on this „sample‟ such as the relative sizes of OTC markets and the shares held by different companies are likely to represent fairly accurately the structure of the market. Second, when analysing trends over a period of time, changes in statistics related to liquidity or to the number of reported deals may reflect changes in coverage by the price reporting agency rather than underlying changes in the statistic. Third, other problems arise when making comparisons across the different Brent layers. For instance, in the futures markets, every deal is reported and the size of the contract is 1000 barrels. In some layers such as Dated Brent and 21 Day BFOE, players can end up with a ship full of crude which limits the attractiveness of these markets to a large number of participants. Hence, one should be careful when comparing across markets as although these are all part of the Brent complex, they differ in nature and function. Furthermore, the nature of trading can be different across markets. For instance, in Dated Brent and 21 Day BFOE, trade in outright differentials or spreads is the norm though 21 Day BFOE can also trade on a fixed price basis. In the futures and options, trade in differentials also constitutes an important component of trade between months. This involves buying a contract in one month (say a June contract) and selling a contract in another month (say a July contract). In terms of reporting, each of the two legs of the transaction is reported as an outright deal. Thus, any comparisons across markets should adjust for the volume of such trade in spreads. The Forward Brent The Forward Brent is one of the first layers to emerge in the Brent complex. The forward Brent is also referred to as 21-day Brent, 21-day BFOE or simply as paper Brent. Forward Brent is a forward contract that specifies the delivery month but not the particular date at which the cargo will be loaded. Forward Brent price is often quoted for three months ahead. For instance, on 25 th May, the Forward Brent is reported for the months of June, July and August. These price quotations represent the value of a cargo of physical delivery in the month specified by the contract. In order to understand the nature of the Forward Brent market, it is important to look at the precursor of the 21-day Brent, the 15-day Brent market. The incentive for oil companies to engage in tax spinning through the forward market was the main factor responsible for the emergence of the forward 15-Day Brent market (Mabro et al. 1986; Horsnell and Mabro, 1993; Bacon, 1986). The valuation of oil for UK fiscal purposes was based on market prices. In an arm‟s-length transaction, market prices were obtained from the realised prices on the deal. 61 If oil was merely transferred within a vertically integrated system, then the fiscal authorities would assign an assessed price to the transaction based on the prices of „contemporary and comparable‟ arm‟s-length deals. Until 1984, these followed the official British National Oil Corporation (BNOC) price. Because of the differential rates of taxation between upstream and downstream with the tax rate being lower in the latter, the impact of the fiscal regime was not neutral and affected a vertically integrated oil company‟s decision to sell or retain crude oil. 62 When the spot price was lower than the official BNOC price, integrated oil companies had the incentive to sell their own crude arm‟s-length and buy the crude needed for their own refineries from the market. When the spot price was higher than the assessed price, oil companies had the incentive to keep the oil for use in their own refineries. In doing so, the oil companies would achieve higher after-tax profits. After the abolition of BNOC, the assessment process of transactions within the firm became more complex. The market value of non-arm‟s-length transactions was based on the average price of contracts (spot and forward)
61 The fiscal authorities specified a number of conditions before a contract could qualify as arm‟s length including the condition that the deal is not made back to back. 62 Tax spinning refers to this situation in which for fiscal reasons oil companies would resort to buying and selling crude oil in the market though it would have been more convenient and cheaper to internalize the transaction (Horsnell and Mabro, 2003:63). 41
preceding the deal. This encouraged oil companies whether vertically integrated or not to engage in tax spinning through the forward market. 63
Although tax spinning continued to provide a motive for trading in these markets, its importance has declined as tighter regulations, introduced later in 1987, made it more difficult and much less predictable. But by then, the 15-day forward market was well established and expanding fast as various market participants including oil companies, traders, and refiners began to trade actively in this market for risk management and speculative purposes. The 15-day Brent market largely evolved in response to the peculiar nature of the delivery schedule of Brent. Companies producing crude oil in the Brent system nominated their preferred date for loading at the relevant month by the 5 th of the preceding month. The loading programme was then organised and finalised by the 15 th of the preceding month. Until the schedule was completed, producers did not know the exact date when their crude oil would be available for delivery. But these producers may have already entered into forward contracts in which they agreed to sell their cargoes for forward delivery for a specified price. Under the 15-day contract, sellers were required to give the buyer of the forward contract at least 15 days notice of the first date of a three-day loading window. Under the 21-day BFOE contract, the seller is required to provide the purchaser at least 21 days notice as to when the cargo will be loaded. For instance, assume that on the 10 th of May, the producer enters into a 21-day BFOE contract for delivery in July. On that day the seller does not know when its crude oil will be available for delivery. In the month prior to delivery, i.e. in June, the loading schedule is published. The seller is given a 3-day window between the 22 nd and 24 th of July in which he can load the oil into tankers. The seller has to nominate the buyer at the latest by the 1 st of July which is the period required to give the buyer notice to take delivery. Depending on the market conditions at the time of nomination, the original buyer may or may not want actual possession of the cargo. In fact, it is likely that the original cargo purchaser has already sold another 21-day contract (i.e. booked out his position) 64 , in which case he must give notice to the new buyer to take the cargo at least 21 days in advance. In this way, the 21-day BFOE contract can transfer hands between buyers and sellers through a daisy chain of notices until a purchaser is ready to accept delivery or the 21-day period expires and/or the holder of the forward can no longer provide notice for any more buyers. 65 Once the notice period is expired, the oil to be loaded on a specific date is classified and traded as Dated Brent. For instance, on the 5 th of July, the cargo is traded as Dated Brent where the delivery date is known (17-19 days ahead). The 21-day BFOE can be either cash-settled by traders offsetting their position in the daisy chain or can be physically settled. However, only a small percentage of forward contracts are physically settled. Figure 8 below shows the average daily traded volume on a monthly basis and the number of participants in the 21-day BFOE market. As seen from this graph, the number of players during one month is small between four and 12 players. Furthermore, the traded volume is low not exceeding 600,000 b/d. Between September 2007 and August 2008, liquidity in the forward market declined at a fast rate reaching the very low level of less than 50,000 b/d in August 2008. However, liquidity recovered in 2009 and 2010 with daily average liquidity in the first half of 2010 reaching more than 400,000 b/d. This is less than one cargo a day compared to around 30 cargoes a day at the heyday of the 15-day Brent market during the late 1980s. Features such as the large size of the cargoes, clocking and the daisy chain games make trading in forward Brent a risky proposition and the domain of few players. This has pushed the industry to find
63 For details on how tax spinning can be transacted through trading in the forward market, see (Horsnell and Mabro, 1993, Chapter 6 and Bacon, 1986). 64 Book out is used to describe the process whereby a daisy chain of forward transactions having been identified (such as creating a circle in which A sells to B who sells to C who sells to A) is closed by financial settlements of price differences rather than physical delivery. 65 In trading terms, the holder of the contract who is unable to require another purchaser to take delivery is said to have been „five-o‟clocked‟. 42
alternative ways to manage their risk without trading in the forward market, which can explain the decline in its trading activity. The futures market has provided such an alternative. Given the central role that the forward market assumes in the Brent complex, ensuring that there is enough liquidity in the 21-day BFOE is crucial to the price discovery process. This is especially the case as the settlement mechanism of the ICE futures Brent contract is based on trading activity in the forward Brent market. Figure 8: Trading Volume and Number of Participants in the 21-Day BFOE Market Source: Argus There are few participants in the 21-day BFOE. Unlike the futures market, the forward contract involves trading in 600,000 barrels which is beyond the capability of many small players and hence the composition is not as diverse as in the futures market. Table 6 below shows the various participants in the Brent forward market and their total volume of trading during the period 2007 and 2010 (September). On the sales side, the main players include oil companies with equity interest such as BP, Shell, Conoco Phillips and Total and some of their trading arms such as Totals‟ TOTSA and physical traders such as Vitol, Phibro and Mercuria. On the purchase side, these same companies also dominate the trading activity. For instance, in 2010, Shell was the most important seller and the third important purchaser while Totsa was the second important seller and the second important buyer. On the purchase side, the four top players Vitol, Mercuria, Totsa, and Shell captured more than 70% of the observed volumes by Argus. On the sales side, these companies captured more than 60% of the trading volumes in 2010. The degree of concentration varies across months and in certain months few players capture the bulk of traded volumes.
0 100,000 200,000 300,000
400,000 500,000
600,000 0 2 4 6 8 10 12 14 Jul-07 Dec-07
May-08 Oct-08
Mar-09 Aug-09
Jan-10 Jun-10
Participants Liquidity (b/d) 43
Table 6: Participants in the 21-Day BFOE Market and their Shares in Trading Volume
Purchases (b/d)
2008 2009 2010 2007 2008 2009 2010 Arcadia 0 0 0 0 485 0 0 0 BP 23,786
3,005 13,699
29,545 25,243
273 10,959
12,662 Chevron 0 273 274 0 0 273 0 0 ConocoPhillips 18,447
11,749 12,329
32,143 6,311
5,464 12,329
29,545 Glencore 0 0 274 0 0 546 548
0 Hess 0 0 9,315 37,338
0 0 10,137 20,779 Hetco 0 0 822 7,143
0 0 1,096 974 Mercuria 12,136
12,842 64,658
79,545 13,107
24,863 54,247
89,286 Morgan Stanley 0 0 274 28,896
0 0 3,014 19,805 Noble 0 0 548 6,494
0 0 822 5,844 Phibro 46,602
19,126 25,479
23,377 36,408
23,770 36,164
14,935 Sempra 15,534
18,306 13,151
8,766 18,447
19,672 13,699
7,792 Shell 34,951
62,022 125,205
91,883 46,117
32,787 73,151
75,000 StatoilHydro 0 273 0 0 0 0 0 0 Total 0 0 0 649
0 0 0 2,273 Totsa 31,068
16,667 53,425
62,987 61,650
28,962 108,767
83,442 Trafigura 0 0 0 16,234
0 0 0 10,714 unknown 0 273 0 0 0 273 0 0 Vitol 68,447
12,842 48,219
56,818 43,204
20,492 42,740
108,766
159,386 369,681 483,828 252,979 159,383 369,682 483,827 The Brent Futures Market The Brent futures contract was initially launched on the International Petroleum Exchange (IPE), now known as the InterContinental Exchange (ICE), in London in June 1988 after a number of failed attempts. As in the case of other futures contracts, the ICE Brent Futures contract‟s terms and conditions are highly standardised, which facilitate trading in these contracts. The futures contract specifies 1,000 barrels of Brent crude oil for delivery in a specified time in the future. The contract expires at the end of the settlement period on the business day immediately preceding the 15 th day of the contract month, if such 15 th day is a business day. For instance, a December contract will expire on the 15 th of November if it is a business day. The ICE Brent Crude futures contract is cash settled with an option of delivery through Exchange for Physicals (EFP). The trading takes place through an electronic exchange which matches bids and offers between anonymous parties. The ICE Brent crude oil futures market has grown dramatically in the last two decades; in 2010, the daily average volume traded exceeded 400,000 contracts or 400 million barrels, more than five times the volume of global oil production (see Figure 9 below). Initially, the features of the Brent futures contract attracted small players but after few years of its development, it started attracting large physical players who enter the market to manage their risk, hedge their positions as well as bet on oil price movements. The futures market has also attracted a wide range of financial players including swap dealers, pension funds, hedge funds, index investors, and technical traders. Yüklə 1,86 Mb. Dostları ilə paylaş:
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