An Anatomy of the Crude Oil Pricing System
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- Bu səhifədəki naviqasiya:
- The Process of Oil Price Identification in the Brent Market
- The Physical Base for US Benchmarks
- PADD 3 Gulf Coast) 3,016 2,804 2,838 2,828 2,699
- PADD 4 (Rocky Mountain) 309 340 357 361 357
- 1,640 1,569 1,426 1,385 1,336 1,274
- Table 9: Operable Refining Capacity by District
- PADD 3 (Total) 5,768 5,676 5,656 5,611 5,375 5,090
- PADD 4 (Total) 260 271 278 278 264 232
- PADD 5 (Total) 926 1,057 1,173 1,149 1,206 1,040
- The Layers and Financial Instruments of WTI
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CFD Explained Date Dated Brent BFOE MAY Loss/Gain CFD Loss/Gain CFD 19/04/2010 83.19 83.53
0.2×(83.19-83.53) -0.068
20/04/2010 84.74
84.86 0.2×(84.74-84.86) -0.024 21/04/2010 84.47 84.62
0.2×(84.47-84.62) -0.03
22/04/2010 84.64
84.78 0.2×(84.64-84.78) -0.028 23/04/2010 86.49 86.43
0.2×(86.49-86.43) 0.012
Total Loss/Gain
-0.138
The refinery‟s final position as of 23 rd of April 2010 is shown in the table below. The high price paid for the cargo in April has been compensated for by the gain in forward position. In this example, the refiner has lost on his CFD position. 69
Example of CFD (continued) Refinery’s Final Position (23 rd of April 2010) Price Paid for the Cargo (Average Dated Brent over the period April 19-April 23) 84.706
Gain on Forward Position 5.25
Loss on CFD -0.138
79.594
Notice from the above example that the CFD allows us to derive in March the Forward price for Dated Brent for the week 19 th -23 rd April. The Forward Dated Brent is simply the CFD plus the second month forward i.e.
Forward Dated Brent = CFD + Second Month Forward Brent Thus, the CFD is not the price differential between the current price of Dated Brent and the Forward Brent Contract. It is rather the difference between the Dated Brent at some stated point in the future and
69 Notice that the refinery‟s position is not perfectly hedged. In the above example, the May Brent is sold in one day and is not being closed over the five day period. The average of the BFOE May over 19 th -23 rd April period is $84.884 in which case the refiner would have made a profit of $5.314 on his forward position. This will yield $79.53, the price of the original hedge. 50
the Second Month Forward Brent. 70 Since CFDs are reported for eight weeks ahead, it is possible to derive the price of Forward Brent for eight weeks ahead. Platts refers to these forward prices as BFOE swaps. These prices provide the vital link between the 21-Day BFOE and Dated Brent and are central for the price discovery process in the Brent market.
Trades in the levels of the oil price rarely take place in the various layers that link the physical dimension of Brent with the Brent futures. Instead, oil price reporting agencies such as Platts and Argus infer or identify the oil price level for a wide variety of crudes by exploiting the linkages and the information derived from the various layers of the Brent market. The process starts by identifying the price of
the month specified by the contract. These price quotations are produced daily for three months ahead. Oil price reporting agencies derive the forward Brent price from deals reported to them by brokers and traders in the forward market (Argus) or based on deals conducted in the window (in the case of Platts). However, movements on ICE futures Brent market can also be factored into the assessment. Furthermore, spread values and EFPs could also be considered. Thus, oil reporting agencies often rely on information from the futures market to derive the price of Forward Brent, especially at times when the forward market is suffering from thin liquidity and is dominated by few deals. The contract that links the futures Brent and the forward Brent is the Exchange for Physicals (EFPs). Oil PRAs have increasingly relied on EFPs to derive the Forward Brent price. These are often priced as differential to the Brent futures price. The Brent futures prices and the EFP for a particular month allow the identification of the forward Brent price for that month. The formula can be as simple as adding the value of EFP in a particular month (say July) as assessed by the oil reporting agency or generated by the futures exchanges to the closing price of the July contract in the futures market i.e. Forward Brent (July) = Futures Price (July) + EFP (July) Having derived the price level for Forward Brent, the next step is to derive the price of Dated Brent. As discussed above, the price of Dated Brent is important to the oil price discovery process as it is considered as the spot market for Brent and should closely reflect the physical conditions in the oil market. As in the case of Forward Brent however, the price of Dated Brent needs to be identified with the help of another layer: the OTC market of Contract for Differences (CFDs). The CFD allows us to derive the Forward Dated Brent using the following formula Forward Dated Brent = CFD plus Second Month Forward Given that CFDs are reported for eight weeks ahead, 71 the Forward Dated Brent can be derived for 8 weeks into future which give us the „Forward Date Brent Curve‟. For each of the weeks, the price of Dated Brent/BFOE swaps is reported. Based on the derived Forward Dated Brent Curve, it is possible to calculate the average of the Forward Dated Brent from day 10 to day 21. These days are the ones assessed for physical delivery. For instance, if today is 21 st May, the 10-21 day cargoes refer to 6 th -17
th June. Argus reports this as the „Anticipated Dated Average for the 10-21 days Forward‟ while Platts uses the term „North Sea Dated Strip‟ or the „Forward Dated Brent‟. These are reported as an outright price. Since BFOE is comprised of four different crudes, these blends of individual crudes often trade as differentials to the 10-21 average of the Forward Dated Brent or North Sea Dated Strip. Based on an
70 An alternative way to understand the equation above is to go through the above example. By buying a Forward contract and CFDs, the trader is able to lock today the price for Dated Brent for delivery at a certain time in the future. 71 In essence CFDs can be traded for any week that is needed to trade, but are only reported for 8-weeks ahead. 51
assessment of these differentials through MOC process or observed deals, it is possible to calculate the price of Dated Brent/BFOE or Dated North Sea Light (Platts) or Argus North Sea Dated (Argus) for the day.
72 Specifically, the price of Dated Brent will settle on the most competitive crude among the BFOE combination which is usually Forties. 73
The above discussion implies that during the last three decades the Brent market has evolved into a complex structure consisting of set of interlinked markets which lie at the heart of the international oil pricing system. The Brent market is multi-layered with the various layers being strongly interconnected by the process of arbitrage. Thus when referring to Brent, it is important to specify what Brent is being referred to: Dated Brent, 21-Day Brent, Brent futures, Brent CFDs or even to Brent altogether as the continuous decline in the physical liquidity meant the Brent Blend has become less important in the North Sea physical complex. These layers and links are central for the price discovery process as identifying the oil price relies heavily on information derived from the financial layers. The implications of these linkages on the oil price formation process are discussed in details in Section 8.
72 Alternatively, one can take a simple average of the four crudes which would result in Platts‟ North Sea Basket. 73 As an example, on May 25, 2010, North Sea Dated Strip was priced at 68.13-68.14. This value was derived from the Dated Brent Swap based on the average of 10- 21 window. Each of the four crudes is priced as a differential to the forward Dated Brent. On May 25, 2010, Brent was priced at -0.11/-0.09; Forties at -0.56/-0.55, Oseberg at 0.36/0.38 and Ekofisk at 0.16/0.18. These differentials are obtained from concluded deals and failing that on bids and offers. Since Forties is the most competitive crude, the Dated Brent/BFOE is obtained by applying the Forties differential. Specifically Dated Brent/BFOE=North Sea Dated Strip (68.13-68.14) + Differential (-0.56/-0.55) = 67.57-67.59. 52
6. The US Benchmarks West Texas Intermediate (WTI) is the main benchmark used for pricing oil imports into the US, the world‟s largest oil consumer. More crude oil is priced-off the Brent complex, but the Light Sweet Crude Oil Futures Contract, which is based on WTI, 74 is one of the most actively traded commodity futures contract. While WTI is the most widely known US crude stream, other crude streams exist alongside WTI. One such is the Light Louisiana Sweet (LLS) crude which has become the local benchmark for sweet crude in the US Gulf Coast. Other important streams include the US-Gulf Coast Sour and Medium crudes such as Mars and Poseidon (produced offshore Louisiana) and Southern Green Canyon (produced offshore Texas). On the basis of transactions in these three crude streams, Argus derives ASCI. Platts publishes a similar index known as America‟s Crude Marker which incorporates the value of the four sour grades: Mars, Poseidon, SGC and Thunder Horse (produced offshore Louisiana).
The US constitutes the largest oil market in the world. In 2009, US consumption accounted for almost a quarter of global consumption. The US is also an important producer, its production reaching 5.3 million b/d or about 5% of the global production in 2009. The US is also an important refining centre with an operable refining capacity exceeding 17 million b/d in 2009. Central to understanding the physical base of US benchmarks is the „Petroleum Allocation for Defense Districts‟ (PADD) regional definitions. The US is divided into five regions or PADDs as seen from the map below. The most important district in terms of production is PADD III where in 2009 it produced more than 3 million b/d out of total US‟s production of 5.3 million b/d (see Table 8 below). PADD III is also the most important refining centre in the US, with refining operable capacity of around 8.5 million b/d accounting for almost half of operable refining capacity in the US (see Table 9).
Source: EIA 74 The Light Sweet Crude Oil Futures contract is also referred to as the WTI futures contract. 53
Table 8: US Oil Production by District 2004
2005 2006
2007 2008
2009 U.S. 5,419
5,178 5,102
5,064 4,950
5,361 PADD 1 (East Coast) 19 23 22 21 21 18 PADD 2 (Midwest) 435 443 458 470 538 591 93 93
98 100
108 108
North Dakota 85
98 109
123 172
218 Oklahoma 171 170
172 167
175 184
PADD 3 Gulf Coast) 3,016 2,804 2,838 2,828 2,699 3,121 Louisiana 228 207
202 210
199 189
Texas 1,073
1,062 1,088
1,087 1,087
1,106 Offshore (PADD 3) 1,453 1,282
1,299 1,277
1,152 1,559
PADD 4 (Rocky Mountain) 309 340 357 361 357 357 Wyoming
141 141
145 148
145 141
PADD 5 (West Coast) 1,640 1,569 1,426 1,385 1,336 1,274 Alaska 908 864
741 722
683 645
North Slope 886
845 724
707 670
638 California 656 631
612 594
586 567
Source: EIA Website
PADD 1 1,736 1,717
1,713 1,720
1,722 1,723
PADD 2 3,526
3,569 3,583
3,595 3,670
3,672 PADD 3 7,967 8,159
8,318 8,349
8,416 8,440
PADD 4 582
589 596
598 605
622 PADD 5 3,164 3,162
3,175 3,187
3,195 3,222
Source: EIA Website
While PADD III constitutes the major production and refining centre in the US, PADD II assumes special importance as it is the main centre for crude oil storage and the delivery point at the expiration of the 54
Light Sweet Crude Oil Futures contract. Cushing, Oklahoma located in PADD II is a gathering hub with large storage facilities: an estimated operable crude storage capacity of 45.9 million barrels and nameplate storage capacity of 55 million barrels. 75 PADD II itself can be divided into two sub regions: the Midcontinent and the Midwest (Purvin and Gertz, 2010). Cushing is located in the Midcontinent. It collects crude oil from Texas, surrounding Oklahoma and other imported crude. It links to major refineries centres both in the Midcontinent, the Midwest (PADD II) and PADD III through a complex set of pipelines. 76 Historically, the refineries in the Midcontinent relied on domestic crude for their runs. However, with the decline in domestic production, refineries in the Midcontinent increased their reliance on foreign imports and Canadian crude delivered into Cushing and the broader region. A similar picture also emerged for the Midwest where historically it has relied heavily on domestic production. However, given the decline in production and its proximity to Canada, Canadian crude started to rise in importance displacing domestic production and imports from outside Canada, a trend which is likely to continue. As seen in Table 10 below, in 2009 Canadian imports accounted for 90% of total oil imports into PADD II. In contrast, refineries in PADD III have access to a wide variety of crude oil with offshore imports from OPEC constituting the bulk of total imports. Table 10: Total Imports by District from OPEC and Canada (Million b/d) 2004 2005 2006 2007 2008 2009 PADD1 (Total) 1,549 1,605 1,497 1,495 1,421 1,244 OPEC
764 893
844 936
807 587
Canada 197
215 210
263 260
215 PADD 2 (Total) 1,584 1,516 1,514 1,497 1,517 1,407 OPEC
370 323
300 345
297 154
Canada 1,054
1,039 1,150
1,125 1,176
1,222 PADD 3 (Total) 5,768 5,676 5,656 5,611 5,375 5,090 OPEC
3,448 3,131
3,147 3,533
3,521 3,013
Canada 18
20 59
96 106
126 PADD 4 (Total) 260 271 278 278 264 232 Canada
260 271
278 278
264 232
PADD 5 (Total) 926 1,057 1,173 1,149 1,206 1,040 OPEC
460 469
493 574
790 601
Canada 87
88 105
126 151
148
Source: EIA Although a wide variety of crude oils is produced in the US, WTI assumes special importance in the global oil and financial markets since WTI underlies the Light Sweet Crude Oil futures contract, one of the largest traded commodity futures contract. It should be noted however though that trade around Cushing, and a forward market around that trade, existed prior to the establishment of the futures market.
75 Storage operators keep 41pc of tank space for their own use and lease 59pc to third parties. Plains and Magellan plan to add a combined 8.25mn bl of new storage at Cushing next year. See Argus Global Markets (2010), EIA Reveals Cushing Tank, 6 December 76 For details see Purvin and Gertz, 2010. 55
That forward market existed in parallel to the futures market through the late 80s and early 90s. However, unlike the Brent market, as futures volumes grew, it eventually eliminated the need for the forward market. This forward market was knows as the „WTI Cash Market‟. Its last vestige exists now only in the 3 days between futures expiry and pipeline scheduling on the 25 th of each month, discussed in details below. WTI is a blend of crude oil produced in the fields of Texas, New Mexico, Oklahoma and Kansas. It is a pipeline crude and deliveries are made at the end of the pipeline system in Cushing, Oklahoma. As in the case of Brent, the WTI market is also characterised by a large number of independent producers who sell their crude oil to large number of gatherers. However, unlike Brent which is waterborne crude, WTI is pipeline crude and thus is subject to problems of logistical and storage bottlenecks. Brent is exportable which makes it more flexible and more responsive to trading conditions in the Western Hemisphere. Furthermore, as discussed later in this section, WTI can show serious dislocations from other markets in some occasions, reducing its attractiveness as a global benchmark or even as a US benchmark.
Very few layers emerged around the WTI, the most important of which are the futures and option contract and OTC derivatives. The Light Sweet Crude Oil Futures contract has been trading on the New York Mercantile Exchange (now part of the CME Group) since 1983. Figure 13 below shows the monthly averages of volumes traded of the Light Sweet Crude Oil Futures Contract for the last 15 years. Between 1995 and 2010 (January-September), the monthly volumes of traded contracts grew at an average annual rate of 15%. As seen from the graph below, the increase in traded volume between 2006 and 2010 has been phenomenal with the average annual growth rate during the period 2007 and 2010 reaching 27%. In 2010, the monthly average volume exceeded 14 million contracts or 14 billion barrels. On a daily basis this amounts to more than 475 million barrels of oil, around 6 times the size of the daily global oil production. Most of the trading takes place through the electronic platform (known as GLOBEX) which provides ease of access from virtually anywhere in the world almost 24 hours a day. A wide range of players are attracted to the futures market including commercial enterprises such as producers, marketers, traders as well as speculators and variety of financial investors such as institutional and index investors. Yüklə 1,86 Mb. Dostları ilə paylaş:
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