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Platts changes pricing formula for Brent crude

BY BEN WINKLEY
 
LONDON -- Platts will change the way it arrives at prices for the influential Brent crudes, the pricing and information service said Friday.

The changes are designed to encourage trade in crudes extracted from the North Sea that separates Britain and Norway--and to ensure that sufficient volumes of oil will be available in the marketplace. A constant supply is needed to avoid any distortion that would come from shrinking availability of the crudes. Adjustments have been required ever since supply from the first North Sea discovery, the Brent field, began to fall in the late 1990s.

The overall impact of Platts' changes on Brent prices remains unknown. However, unfettered prices are crucial to the market because Brent crude is used as the pricing benchmark for 60% of the global oil market, involving billions of dollars each day.

The McGraw-Hill-owned company said it will introduce "quality premiums" for Oseberg and Ekofisk crudes, two of the four grades that make up the physical cash market Brent-Forties-Oseberg-Ekofisk, collectively known as BFOE.

The quality premiums mean increasing the price paid for those crudes--as part the pricing formula--in an effort to swell the volumes that are made available in the BFOE physical cash market, which is a market where deliveries are agreed for the near future.

The cash market has a symbiotic relationship with the widely traded Brent futures, which are financial contracts based the price of crude in future months. The futures market offers an always-open window on prices for Brent crude--and when a Brent futures contract expires, the price is based on the average value of BFOE cash cargoes.

Currently, sellers of Ekofisk and Oseberg cargoes can make more money trading them on the spot market, where a buyer and a seller agree a deal for immediate delivery. This removes available volumes from the cash market and knocks the cash price out of kilter.

Platts says the quality premiums, to be introduced in June, will close the price gaps and rebalance the market. The premiums will be set at 50% of the net price difference between the two grades and the cheapest of all four BFOE grades, based on an average of the two previous months.

However, the pricing agency said it won' t introduce a quality premium for the Brent grade, believing this is "counterintuitive" as it is already is widely traded in the market.

This keeps Platts at odds with some of the North Sea' s biggest trade players.

Shell has already said it will implement a premium for Brent and a lower premium for Oseberg than that proposed by Platts. There is agreement on Eksofisk.

Shell' s proposals are broadly supported by its fellow U.K. oil major, BP.

Traders said a unified position would be welcomed by the market. They fear confusion in the market due to price-setting under separate methods.

A Shell spokesman said Friday that the company "will review the announcement from Platts and respond in due course." BP wouldn' t immediately comment.

Dow Jones Newswires

03/18/2013

 

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