An Anatomy of the Crude Oil Pricing System
Yüklə 1,86 Mb. Pdf görüntüsü
|
- Bu səhifədəki naviqasiya:
- Bassam Fattouh 1 WPM 40 January 2011
- Oxford Institute for Energy Studies
- List of Figures
|
1
An Anatomy of the Crude Oil Pricing System
Bassam Fattouh 1 WPM 40
1 Bassam Fattouh is the Director of the Oil and Middle East Programme at the Oxford Institute for Energy Studies; Research Fellow at St Antony‟s College, Oxford University; and Professor of Finance and Management at the School of Oriental and African Studies, University of London. I would like to express my gratitude to Argus for supplying me with much of the data that underlie this research. I would also like to thank Platts for providing me with the data for Figure 21 and CME Group for providing me with the data for Figure 13. The paper has benefited greatly from the helpful comments of Robert Mabro and Christopher Allsopp and many commentators who preferred to remain anonymous but whose comments provided a major source of information for this study. The paper also benefited from the comments received in seminars at the Department of Energy and Climate Change, UK, ENI, Milan and Oxford Institute for Energy Studies, Oxford. Finally, I would like to thank those individuals who have given their time for face-to-face and/or phone interviews and have been willing to share their views and expertise. Any remaining errors are my own. 2
The contents of this paper are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its members.
Copyright © 2011 Oxford Institute for Energy Studies (Registered Charity, No. 286084)
permission from the copyright holder, provided acknowledgment of the source is made. No use of this publication may be made for resale or for any other commercial purpose whatsoever without prior permission in writing from the Oxford Institute for Energy Studies.
ISBN 978-1-907555-20-6
3
Summary Report ........................................................................................................................................... 6 1. Introduction ......................................................................................................................................... 11 2. Historical Background to the International Oil Pricing System .......................................................... 14 The Era of the Posted Price ..................................................................................................................... 14 The Pricing System Shaken but Not Broken .......................................................................................... 14 The Emergence of the OPEC Administered Pricing System .................................................................. 15 The Consolidation of the OPEC Administered Pricing System .............................................................. 16 The Genesis of the Crude Oil Market ..................................................................................................... 17 The Collapse of the OPEC Administered Pricing System ...................................................................... 18 3. The Market-Related Oil Pricing System and Formulae Pricing ......................................................... 20 Spot Markets, Long-Term Contracts and Formula Pricing ..................................................................... 20 Benchmarks in Formulae Pricing ............................................................................................................ 24 4. Oil Price Reporting Agencies and the Price Discovery Process ......................................................... 30 5. The Brent Market and Its Layers ........................................................................................................ 36 The Physical Base of North Sea .............................................................................................................. 37 The Layers and Financial Instruments of the Brent Market ................................................................... 39 Data Issues .......................................................................................................................................... 39 The Forward Brent .............................................................................................................................. 40 The Brent Futures Market ................................................................................................................... 43 The Exchange for Physicals ................................................................................................................ 44 The Dated Brent/BFOE ....................................................................................................................... 45 The Contract for Differences (CFDs) ................................................................................................. 45 OTC Derivatives ................................................................................................................................. 48 The Process of Oil Price Identification in the Brent Market ................................................................... 50 6. The US Benchmarks ........................................................................................................................... 52 The Physical Base for US Benchmarks .................................................................................................. 52 The Layers and Financial Instruments of WTI ....................................................................................... 55 The Price Discovery Process in the US Market ...................................................................................... 56 WTI: The Broken Benchmark? ............................................................................................................... 58 7. The Dubai-Oman Market .................................................................................................................... 61 The Physical Base of Dubai and Oman .................................................................................................. 61 The Financial Layers of Dubai................................................................................................................ 62 4
The Price Discovery Process in the Dubai Market ................................................................................. 64 Oman and its Financial Layers: A New Benchmark in the Making?...................................................... 66 8.
Assessment and Evaluation ................................................................................................................. 70 Physical Liquidity of Benchmarks .......................................................................................................... 70 Shifts in Global Oil Demand Dynamics and Benchmarks ...................................................................... 71 The Nature of Players and the Oil Price Formation Process ................................................................... 73 The Linkages between Physical Benchmarks and Financial Layers ....................................................... 74 Adjustments in Price Differentials versus Price Levels .......................................................................... 74 Transparency and Accuracy of Information ........................................................................................... 76 9.
Conclusions ......................................................................................................................................... 78 References ................................................................................................................................................... 81
Figure 1: Price Differentials of Various Types of Saudi Arabia‟s Crude Oil to Asia in $/Barrel .............. 21 Figure 2: Differentials of Term Prices between Saudi Arabia Light and Iran Light Destined to Asia (FOB) (In US cents) ............................................................................................................................................... 23 Figure 3: Difference in Term Prices for Various Crude Oil Grades to the US Gulf (Delivered) and Asia (FOB) .......................................................................................................................................................... 24 Figure 4: Price Differential between Dated Brent and BWAVE ($/Barrel) ............................................... 26 Figure 5: Price Differential between WTI and ASCI ($/Barrel) (ASCI Price=0) ....................................... 26 Figure 6: Brent Production by Company (cargoes per year), 2007 ............................................................ 37 Figure 7: Falling output of BFO ................................................................................................................. 38 Figure 8: Trading Volume and Number of Participants in the 21-Day BFOE Market ............................... 42 Figure 9: Average Daily Volume and Open Interest of ICE Brent Futures Contract ................................. 44 Figure 10: Pricing basis of Dated Brent Deals (1986-1991); Percentage of Total Deals ........................... 45 Figure 11: Reported Trade on North Sea CFDs (b/d) ................................................................................. 46 Figure 12: US PADDS ................................................................................................................................ 52 Figure 13: Monthly averages of volumes traded of the Light Sweet Crude Oil Futures Contract ............. 55 Figure 14:Liquidity at Different Segments of the Futures Curve (October 19, 2010) ................................ 56 Figure 15: Spot Market Traded Volumes (b/d) (April 2009 Trade Month) ................................................ 57 Figure 16: Spread between WTI 12-weeks Ahead and prompt WTI ($/Barrel) ......................................... 59 Figure 17: WTI-BRENT Price Differential ($/Barrel)................................................................................ 60 Figure 18: Dubai and Oman Crude Production Estimates (thousand barrels per day) ............................... 62 Figure 19: Spread Deals as a Percentage of Total Number of Dubai Deals ............................................... 63 Figure 20: Oman-Dubai Spread ($/Barrel) ................................................................................................. 64 Figure 21: Dubai Partials Jan 2008 - Nov 2010 .......................................................................................... 65 Figure 22: daily Volume of Traded DME Oman Crude Oil Futures Contract ........................................... 67 Figure 23: Volume and Open Interest of the October 2010 Futures Contracts (Traded During Month of August) ........................................................................................................................................................ 68
5
Figure 24: OECD and Non-OECD Oil Demand Dynamics ........................................................................ 71 Figure 25: Change in Oil Trade Flow Dynamics ........................................................................................ 72 Figure 26: The North Sea Dated differential to Ice Brent during the French Strike ................................... 76
6
The view that crude oil has acquired the characteristics of financial assets such as stocks or bonds has gained wide acceptance among many observers. However, the nature of „financialisation‟ and its implications are not yet clear. Discussions and analyses of „financialisation‟ of oil markets have partly been subsumed within analyses of the relation between finance and commodity indices which include crude oil. The elements that have attracted most attention have been outcomes: correlations between levels, returns, and volatility of commodity and financial indices. However, a full understanding of the degree of interaction between oil and finance requires, in addition, an analysis of interactions, causations and processes such as the investment and trading strategies of distinct types of financial participants; the financing mechanisms and the degree of leverage supporting those strategies; the structure of oil derivatives markets; and most importantly the mechanisms that link the financial and physical layers of the oil market. Unlike a pure financial asset, the crude oil market also has a „physical‟ dimension that should anchor prices in oil market fundamentals: crude oil is consumed, stored and widely traded with millions of barrels being bought and sold every day at prices agreed by transacting parties. Thus, in principle, prices in the futures market through the process of arbitrage should eventually converge to the so-called „spot‟ prices in the physical markets. The argument then goes that since physical trades are transacted at spot prices, these prices should reflect existing supply-demand conditions. In the oil market, however, the story is more complex. The „current‟ market fundamentals are never known with certainty. The flow of data about oil market fundamentals is not instantaneous and is often subject to major revisions which make the most recent available data highly unreliable. Furthermore, though many oil prices are observed on screens and reported through a variety of channels, it is important to explain what these different prices refer to. Thus, although the futures price often converges to a „spot‟ price, one should aim to analyse the process of convergence and understand what the „spot‟ price in the context of the oil market really means. Unfortunately, little attention has been devoted to such issues and the processes of price discovery in oil markets and the drivers of oil prices in the short-run remain under-researched. While this topic is linked to the current debate on the role of speculation versus fundamentals in the determination of the oil price, it goes beyond the existing debates which have recently dominated policy agendas. This report offers a fresh and deeper perspective on the current debate by identifying the various layers relevant to the price formation process and by examining and analysing the links between the financial and physical layers in the oil market, which lie at the heart of the current international oil pricing system. The adoption of the market-related pricing system by many oil exporters in 1986-1988 opened a new chapter in the history of oil price formation. It represented a shift from a system in which prices were first administered by the large multinational oil companies in the 1950s and 1960s and then by OPEC for the period 1973-1988 to a system in which prices are set by „markets‟. First adopted by the Mexican national oil company PEMEX in 1986, the market-related pricing system received wide acceptance among most oil-exporting countries. By 1988, it became and still is the main method for pricing crude oil in international trade after a short experimentation with a products-related pricing system in the shape of the netback pricing regime in the period 1986-1987. The oil market was ready for such a transition. The end of the concession system and the waves of nationalisation which disrupted oil supplies to multinational oil companies established the basis of arm‟s-length deals and exchange outside the vertically and horizontally integrated multinational companies. The emergence of many suppliers outside OPEC and many buyers further increased the prevalence of such arm‟s-length deals. This led to the development of a complex structure of interlinked oil markets which consist of spot and also physical forwards, futures, options and other derivative markets referred to as paper markets. Technological innovations which made electronic trading possible revolutionised these markets by allowing 24-hour trading from any place in the 7
world. It also opened access to a wider set of market participants and allowed the development of a large number of trading instruments both on regulated exchanges and over the counter. Physical delivery of crude oil is organised either through the spot (cash) market or through long-term contracts. The spot market is used by transacting parties to buy and sell crude oil not covered by long term contractual arrangements and applies often to one-off transactions. Given the logistics of transporting oil, spot cargoes for immediate delivery are rare. Instead, there is an important element of forwardness in spot transactions. The parties can either agree on the price at the time of agreement, in which case the sport transaction becomes closer to a „forward‟ contract. More often though, transacting parties link the pricing of an oil cargo to the time of loading. Long-term contracts are negotiated bilaterally between buyers and sellers for the delivery of a series of oil shipments over a specified period of time, usually one or two years. They specify among other things, the volumes of crude oil to be delivered, the delivery schedule, the actions to be taken in case of default, and above all the method that should be used in calculating the price of an oil shipment. Price agreements are usually concluded on the method of formula pricing which links the price of a cargo in long-term contracts to a market (spot) price. Formula pricing has become the basis of the oil pricing system. Formula pricing has two main advantages. Crude oil is not a homogenous commodity. There are various types of internationally traded crude oil with different qualities and characteristics which have a bearing on refining yields. Thus, different crudes fetch different prices. Given the large variety of crude oils, the price of a particular type is usually set at a discount or at a premium to marker or reference prices, often referred to as benchmarks. The differentials are adjusted periodically to reflect differences in the quality of crudes as well as the relative demand and supply of the various types of crudes. Another advantage of formula pricing is that it increases pricing flexibility. When there is a lag between the date at which a cargo is bought and the date of arrival at its destination, there is a price risk. Transacting parties usually share this risk through the pricing formula. Agreements are often made for the date of pricing to occur around the delivery date. At the heart of formulae pricing is the identification of the price of key „physical‟ benchmarks, such as West Texas Intermediate (WTI), Dated Brent and Dubai-Oman. The benchmark crudes are a central feature of the oil pricing system and are used by oil companies and traders to price cargoes under long- term contracts or in spot market transactions; by futures exchanges for the settlement of their financial contracts; by banks and companies for the settlement of derivative instruments such as swap contracts; and by governments for taxation purposes. Few features of these physical benchmarks stand out. Markets with relatively low volumes of production such as WTI, Brent, and Dubai set the price for markets with higher volumes of production elsewhere in the world. Despite the high level of volumes of production in the Gulf, these markets remain illiquid: there is limited spot trading in these markets, no forwards or swaps (apart from Dubai), and no liquid futures market since crude export contracts include destination and resale restrictions which limit trading options. While the volume of production is not a sufficient condition for the emergence of a benchmark, it is a necessary condition for a benchmark‟s success. As markets become thinner and thinner, the price discovery process becomes more difficult. Oil price 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. So far the low and continuous decline in the physical base of existing benchmarks has been counteracted by including additional crude streams in an assessed benchmark. This had the effect of reducing the chance 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, observers should not be distracted from some key questions: What are the conditions necessary for the emergence of successful benchmarks in the most physically liquid market? Would a shift to assessing 8
price in these markets improve the price discovery process? Such key questions remain heavily under- researched in the energy literature and do not feature in the consumer-producer dialogue. The emergence of the non-OECD as the main source of growth in global oil demand will only increase the importance of such questions. One of the most important shifts in oil market dynamics in recent years has been the shift in oil trade flows to Asia: this may have long-term implications on pricing benchmarks. Questions are already being raised whether Dubai still constitutes an appropriate benchmark for pricing crude oil exports to Asia given its thin physical base or whether new benchmarks are needed to reflect more accurately the recent shift in trade flows and the rise in prominence of the Asian consumer. Unlike the futures market where prices are observable in real time, the reported prices of physical benchmarks are „identified‟ or „assessed‟ prices. Assessments are needed in opaque markets such as crude oil where physical transactions concluded between parties cannot be directly observed by outsiders. Assessments are also needed in illiquid markets where there are not enough representative deals or where no transactions are concluded. These assessments are carried out by oil pricing reporting agencies (PRAs), the two most important of which are Platts and Argus. While PRAs have been an integral part of the oil pricing system, especially since the shift to the market-related pricing system in 1986, their role has recently been attracting considerable attention. In the G20 summit in Korea in November 2010, the G20 leaders called for a more detailed analysis on „how the oil spot market prices are assessed by oil price reporting agencies and how this affects the transparency and functioning of oil markets‟. In its latest report in November 2010, IOSCO points that „the core concern with respect to price reporting agencies is the extent to which the reported data accurately reflects the cash market in question‟. PRAs do not only act as „a mirror to the trade‟. In their attempt to identify the price that reflects accurately the market value of an oil barrel, PRAs enter into the decision-making territory which can influence market structure. What they choose to do is influenced by market participants and market structure while they in turn influence the trading strategies of the various participants. New markets and contracts may emerge to hedge the risks arising from some PRAs‟ decisions. To evaluate the role of PRAs in the oil market, it is important to look at three inter-related dimensions: the methodology used in indentifying the oil price; the accuracy of price assessments; and the internal measures that PRAs implement to protect the integrity and ensure an efficient assessment process. There is a fundamental difference in the methodology and in the philosophy underlying the price assessment process between the various PRAs. As a result, different agencies may produce different prices for the same benchmark. This raises the issue of which method produces a more accurate price assessment. Given that assessed prices underlie long-term contracts, spot transactions and derivatives instruments, even small differences in price assessments between PRAs have important implications on exporters‟ revenues and financial flows between parties in financial contracts. In the last two decades or so, many financial layers (paper markets) have emerged around crude oil benchmarks. They include the forward market (in Brent and Dubai), swaps, futures, and options. Some of the instruments such as futures and options are traded on regulated exchanges such as ICE and CME Group, while other instruments, such as swaps, options and forward contracts, are traded bilaterally over the counter (OTC). Nevertheless, these financial layers are highly interlinked through the process of arbitrage and the development of instruments that links the various layers together. Over the years, these markets have grown in terms of size, liquidity, sophistication and have attracted a diverse set of players both physical and financial. These markets have become central for market participants wishing to hedge their risk and to bet on oil price movements. Equally important, these financial layers have become central to the oil price identification process. At the early stages of the current pricing system, linking prices to benchmarks in formulae pricing provided producers and consumers with a sense of comfort that the price is grounded in the physical dimension of the market. This implicitly assumes that the process of identifying the price of benchmarks can be isolated from financial layers. However, this is far from reality. The analysis in this report shows that the different layers of the oil market form a complex web of links, all of which play a role in the price discovery process. The information derived from financial layers is essential for identifying the price 9
level of the benchmark. In the Brent market, the oil price in the forward market is sometimes priced as a differential to the price of the Brent futures contract using the Exchange for Physicals (EFP) market. The price of Dated Brent or North Sea Dated in turn is priced as a differential to the forward market through the market of Contract for Differences (CFDs), another swaps market. Given the limited number of physical transactions and hence the limited amount of deals that can be observed by oil reporting agencies, the value of Dubai, the main benchmark used for pricing crude oil exports to East Asia, is often assessed by using the value of differentials in the very liquid OTC Dubai/Brent swaps market. Thus, one could argue that without these financial layers it would not be possible to „discover‟ or „identify‟ oil prices in the current oil pricing system. In effect, crude oil prices are jointly or co-determined in both layers, depending on differences in timing, location and quality of crude oil. Since physical benchmarks constitute the pricing basis of the large majority of physical transactions, some observers claim that derivatives instruments such as futures, forwards, options and swaps derive their value from the price of these physical benchmarks, i.e., the prices of these physical benchmarks drive the prices in paper markets. However, this is a gross over-simplification and does not accurately reflect the process of crude oil price formation. The issue of whether the paper market drives the physical or the other way around is difficult to construct theoretically and test empirically and requires further research. The report also calls for broadening the empirical research to include the trading strategies of physical players. In recent years, the futures markets have attracted a wide range of financial players including swap dealers, pension funds, hedge funds, index investors, technical traders, and high net worth individuals. There are concerns that these financial players and their trading strategies could move the oil price away from the „true‟ underlying fundamentals. The fact remains however that the participants in many of the OTC markets such as forward markets and CFDs which are central to the price discovery process are mainly „physical‟ and include entities such as refineries, oil companies, downstream consumers, physical traders, and market makers. Financial players such as pension funds and index investors have limited presence in many of these markets. Thus, any analysis limited to non-commercial participants in the futures market and their role in the oil price formation process is incomplete and also potentially misleading. The report also makes the distinction between trade in price differentials and trade in price levels. It shows that trades in the levels of the oil price rarely take place in the layers surrounding the physical benchmarks. We postulate that the price level of the main crude oil benchmarks is set in the futures markets; the financial layers such as swaps and forwards set the price differentials depending on quality, location and timing. These differentials are then used by oil reporting agencies to identify the price level of a physical benchmark. If the price in the futures market becomes detached from the underlying benchmark, the differentials adjust to correct for this divergence through a web of highly interlinked and efficient markets. Thus, our analysis reveals that the level of the crude oil price, which consumers, producers and their governments are most concerned with, is not the most relevant feature in the current pricing system. Instead, the identification of price differentials and the adjustments in these differentials in the various layers underlie the basis of the current crude oil pricing system. By trading differentials, market participants limit their exposure to the risks of time, location grade and volume. Unfortunately, this fact has received little attention and the issue of whether price differentials between different markets showed strong signs of adjustment in the 2008-2009 price cycle has not yet received due attention in the empirical literature. But this leaves us with a fundamental question: what determines the price level of a certain benchmark in the first place? The pricing system reflects how the oil market functions: if price levels are set in the futures market and if market participants in these markets attach more weight to future fundamentals rather than current fundamentals and/or if market participants expect limited feedbacks from both the 10
supply and demand side in response to oil price changes, these expectations will be reflected in the different layers and will ultimately be reflected in the assessed spot price of a certain benchmark. The current oil pricing system has survived for almost a quarter of a century, longer than the OPEC administered system. While some of the details have changed, such as Saudi Arabia‟s decision to replace Dated Brent with Brent futures in pricing its exports to Europe and the more recent move to replace WTI with Argus Sour Crude Index (ASCI) in pricing its exports to the US, these changes are rather cosmetic. The fundamentals of the current pricing system have remained the same since the mid 1980s: the price of oil is set by the „market‟ with PRAs making use of various methodologies to reflect the market price in their assessments and making use of information in the financial layers surrounding the global benchmarks. In the light of the 2008-2009 price swings, the oil pricing system has received some criticism reflecting the unease that some observers feel with the current system. Although alternative pricing systems could be devised such as bringing back the administered pricing system or calling for producers to assume a greater responsibility in the method of price formation by removing destination restrictions on their exports, or allowing their crudes to be auctioned, the reality remains that the main market players such as oil companies, refineries, oil exporting countries, physical traders and financial players have no interest in rocking the boat. Market players and governments get very concerned about oil price behaviour and its global and local impacts, but so far have showed much less interest in the pricing system and market structure that signalled such price behaviour in the first place.
11
1. Introduction The adoption of the market-related pricing system by many oil exporters in 1986-1988 opened a new chapter in the history of oil price formation. It represented a shift from a system in which prices were first administered by the large multinational oil companies in the 1950s and 1960s and then by OPEC for the period 1973-1988 to a system in which prices are set by „markets‟. But what is really meant by the „market price‟ or the „spot price‟ of crude oil? The concept of the „market price‟ of oil associated with the current pricing regime has often been surrounded with confusion. Crude oil is not a homogenous commodity. There are various types of internationally traded crude oil with different qualities and characteristics which have a bearing on refining yields. Thus, different crudes fetch different prices. In the current system, the prices of these crudes are usually set at a discount or a premium to a benchmark or reference price according to their quality and their relative supply and demand. However, this raises a series of questions. How are these price differentials set? More importantly, how is the price of the benchmark or reference crude determined? A simple answer to the latter question would be „the market‟ and the forces of supply and demand for these benchmark crudes. But this raises additional questions. What are the main features of the spot physical markets for these benchmarks? Do these markets have enough liquidity to ensure an efficient price discovery process? What are the roles of the various financial layers such as the futures markets and other derivatives-based instruments that have emerged around the physical benchmarks? Do these financial layers enhance or hamper the price discovery function? Does the distinction between the different layers of the market matter or have the different layers become so inter-linked that the distinction is no longer meaningful? And if the distinction does matter, what do prices in different markets reflect? It is clear from all these questions that the concept of „market price‟ needs to be defined more precisely. The argument that the market determines the oil price has little explanatory power. The above questions have assumed special importance in the last few years. The sharp swings in oil prices and the marked increase in volatility during the latest 2008-2009 price cycle have raised concerns about the impact of financial layers and financial investors on oil price behaviour. 2 Some observers in the oil industry and in academic institutions attribute the recent behaviour in prices to structural transformations in the oil market. According to this view, the boom in oil prices can be explained in terms of tightened market fundamentals, rigidities in the oil industry due to long periods of underinvestment, and structural changes in the behaviour of key players such as non-OPEC suppliers, OPEC members, and non-OECD consumers. 3 On the other hand, other observers consider that the changes in fundamentals or even in expectations, have not been sufficiently dramatic to justify the extreme cycles in oil prices over the period 2008-2009. Instead, the oil market is seen as having been distorted by substantial and volatile flows of financial investments in deregulated or poorly regulated crude oil derivatives instruments. 4
The view that crude oil has acquired the characteristics of financial assets such as stocks or bonds has gained wide acceptance among many observers but is disputed by others. 5 Many empirical papers 2 For a comprehensive overview, see Fattouh (2009). 3 See, for instance, IMF (2008), World Economic Outlook (October), Washington: International Monetary Fund; Commodity Futures Trading Commission (2008), Interagency Task Force on Commodity Markets Interim Report on Crude Oil; Killian and Murphy (2010).
4
Excessive Speculation: Position Limits and Exemptions, 5 August 2009. Greenberger provides an extensive list of studies that are in favour of the speculation view. 5 See, for instance, Yergin (2009). Yergin argues that the excessive „daily trading has helped turn oil into something new -- not only a physical commodity critical to the security and economic viability of nations but also a financial asset, part of that great instantaneous exchange of stocks, bonds, currencies, and everything else that makes up the world's financial portfolio‟.
12
examine whether the price behaviour of commodities mimics that of financial assets and whether commodity and equity prices have become increasingly correlated. 6 However, the nature of „financialisation‟ and its implications are not yet clear in these studies. Discussions and analyses of „financialisation‟ of oil markets have partly been subsumed within analyses of the relation between finance and commodity indices which include crude oil. The elements that have attracted most attention have been outcomes: correlations between levels, returns, and volatility of commodity and financial indices. However, a full understanding of the degree of interaction between oil and finance requires, in addition, an analysis of interactions, causations and processes such as the investment and trading strategies of distinct types of financial participants; the financing mechanisms and the degree of leverage supporting those strategies; the structure of oil derivatives markets; and most importantly the mechanisms that link the financial and physical layers of the oil market. One important aspect of „financialisation‟ often highlighted is the increasing role that expectations play in the pricing of crude oil. In the case of equities, pricing is based on expectations of a firm‟s future earnings. In the oil market, expectations of future market fundamentals have increasingly been playing an important role in oil pricing. According to some observers, if there is large uncertainty as to what the long-term oil market fundamentals are, or if perceptions of these fundamentals are highly exaggerated and inflated, then the oil price in the futures market can diverge away from its true underlying fundamental value causing an oil price bubble. 7
anchor these expectations in oil market fundamentals: crude oil is consumed, stored and widely traded with millions of barrels being bought and sold every day at prices agreed by transacting parties. Thus, in principle, prices in the futures market through the process of arbitrage should eventually converge to the so-called „spot‟ prices in the physical markets. The argument then goes that since physical deals are transacted at spot prices, these prices reflect existing supply-demand conditions. In the oil market, however, the story is more complex. To begin with, the „current‟ market fundamentals are never known with certainty. The flow of data about oil market fundamentals is not instantaneous and is often subject to major revisions which make the most recent available data highly unreliable. More importantly for this paper, though many oil prices are observed on screens and reported through a variety of channels, it is important to understand what these different prices really mean. Thus, although the futures price often converges to a „spot‟ price, it is important to analyse the process of convergence and understand what the „spot‟ price really means in the context of the oil market. Unfortunately, little attention has been devoted to such issues and the processes of price discovery and price formation in oil markets remain under-researched. While this topic can be linked to the current debate on the role of speculation versus fundamentals in the determination of oil prices, it goes beyond the existing debates which have recently dominated policy agendas. This paper offers a fresh and deeper perspective on the current debate by analysing how oil prices are discovered in the current international pricing system, by identifying the various layers relevant for the price formation process and by
6 See, for instance, Tang and Xiong (2010) who find that commodity prices (more specifically the commodity indices GSCI and DJ-UBS), world equity indices, and the US dollar have become increasingly correlated. Silvennoinen and Thorp (2010) also find an increasing degree of integration between commodities and financial markets especially since the late 1990s. They find that factors such as lower interest rates and corporate bond spreads, US dollar depreciations and financial traders‟ open positions can explain commodity returns‟ volatility. In contrast, Büyükşahin, Haig and Robe (2010) find that the relation between commodity and US equity returns did not witness any significant change in the last decade or so. This even applies to periods when markets have witnessed extreme returns. Gorton and Rouwenhorst (2004) find that commodity futures returns are negatively correlated with equity returns and bond returns. This can be explained in terms of the different behaviour of commodities and other asset classes over the business cycle. 7 See, for instance, Jalali-Naini (2009). 13
examining and analysing the links between the financial and physical layers in the oil market, which lie at the heart of the current international oil pricing system. The main purposes of this paper are to analyse the main features of the current crude oil pricing system; to describe the structure of the main benchmarks currently used namely Brent, West Texas Intermediate (WTI) and Dubai-Oman; to clearly identify the various financial layers that have emerged around these physical benchmarks; to analyse the links between the different financial layers and between the financial layers and the physical benchmarks; and then to evaluate how these links influence the price discovery and oil price formation process in the crude oil market. The paper is divided into seven sections. Section 2 provides a historical background to the current international pricing regime analysing the major transformations in the oil market during the last 50 years or so, and the different pricing systems that have been associated with the various market structures. Section 3 discusses the main features of the pricing formulae that constitute the basis of the market-related crude oil pricing system. Section 4 discusses the role of oil pricing reporting agencies in the current oil pricing system. Sections 5, 6 and 7 analyse the three widely used benchmarks in the international oil pricing system Brent, WTI and Dubai, describing their physical base, and analysing the financial layers that have emerged around these physical benchmarks. Section 8 evaluates the links between the physical benchmarks and financial layers and draws the main implications on the oil price formation process. The last section offers some conclusions. Yüklə 1,86 Mb. Dostları ilə paylaş:
|