Saudis drop WTI benchmark

[mooncliff]

October 28 2009 20:27Saudi Arabia on Wednesday decided to drop the widely used West Texas Intermediate oil contract as the benchmark for pricing its oil, dealing a serious blow to the New York Mercantile Exchange.
The decision by the world’s biggest oil exporter could encourage other producers to abandon the benchmark and threatens the dominance of the world’s most heavily traded oil futures contract.

http://www.ft.com/cms/s/0/8cda145a-c...nclick_check=1


What might the ramifications be?

[Slimprofits]

Re: Saudis drop WTI benchmark

Saudi Aramco Switches to Argus Sour Crude Index for US Deliveries

http://www.prnewswire.com/news-relea...-66952527.html

that's the press release from Argus with a white paper on the ASCI attached to it.

http://www.theglobeandmail.com/globe...rticle1343235/

The move reveals the growing discontent of Riyadh and its US refinery customers with WTI after the price of the benchmark became separated from the global oil market this year.

The surge in oil inventories in Cushing, Oklahoma, where WTI is delivered into America's pipeline system, depressed the value of the WTI contract against other benchmarks, throwing the oil market into disarray.

In January, WTI, which usually trades at a premium of $1-$2 (U.S.) a barrel to Brent, fell sharply, leaving it at a discount of almost $12 - a record gap.

This dislocation in the market continued well into the summer.

Edward Morse, chief economist at LCM Commodities in New York, said that the Saudi move was linked to the large swings in WTI prices against other benchmarks early this year.

Paul Horsnell, head of commodities research at Barclays Capital in London, said Saudi Arabia's decision was likely to reflect a "wider discontent" from customers in the US about WTI performance.

[..]

Bob Levin, managing director of market research at Nymex, said that the exchange was ready to move with the market.

"We plan to introduce a cash-settled futures contract tracking the new Argus index," he said.

He added that the new futures contract was "compatible with a strong" WTI market.

[halcyon]

Re: Saudis drop WTI benchmark

What might the ramifications be?

WTI based speculation becomes harder. Oil prices might not continue to rally so high during a false recovery - will need a real demand rebound and spare capacity reduction for that to to happen, but there'll be a floor around 65-70 USD level(ish) at current dollars.

Time will tell.

I think it is for obvious reasons. KSA is trying to prevent the fiasco of the 80s when they became hugely indebted due to impossibility of oil price planning and prices crashing due to bubbling.

This time hey are trying to trade it in a range.

That's my reading at any rate, tfwiw. not an expert.

[mooncliff]

Re: Saudis drop WTI benchmark

... the shift also speaks to the slow, but dramatic, reshaping of the global energy landscape, as emerging countries take an increasingly prominent role in the oil trade.

The U.S. share of world crude use has fallen to less than 23 per cent in 2008 from 26 per cent in 2001.

...

As a result, the pricing of the U.S.-based WTI has begun to decline in importance. Although Argus is also a U.S. price, it is more closely linked with international oil and is seen as a more reliable indicator of global oil prices.

“What it [the Saudi move] really speaks to is the demand shift in oil away from the U.S. and to other places in the world. ...

“North American oil demand has peaked,” he said. “What this really says is that whereas WTI in the past had been a premium price, now WTI is going to be a discount price.”

...

... WTI is based on a light, sweet crude. Saudi Aramco produces primarily sour oil, meaning it contains sulphur, and a move to a sour crude index may simply be a move to a price benchmark that more accurately reflects its product.

...

It is a “tectonic shift, really, in the way that imported crude is priced in the U.S.,” Mr. Craik said. “It's quite possible that other countries will follow Saudi Arabia's lead.”

http://www.theglobeandmail.com/globe...rticle1344348/

[Verdred]

Re: Saudis drop WTI benchmark

October 28 2009 20:27Saudi Arabia on Wednesday decided to drop the widely used West Texas Intermediate oil contract as the benchmark for pricing its oil, dealing a serious blow to the New York Mercantile Exchange.
The decision by the world’s biggest oil exporter could encourage other producers to abandon the benchmark and threatens the dominance of the world’s most heavily traded oil futures contract.

http://www.ft.com/cms/s/0/8cda145a-c...nclick_check=1


What might the ramifications be?

Yeah, if the commodity wonks could weigh in here. What does this do to oil etf's like DBO?

[I was in a russian emerging stock thing when Russia banned investment in like half of its economy (maybe two years ago?) and the fund lost 10% in a day. See I'm lucky like that. (Another good one, I was mega-long nat. gas the day the Marcellus Shale story broke; I'm a lover of life what can I say). So this is just to say, I always keep events like this WTI thing in mind when investing.]

As for the geo-political thing. Is Saudi Arabia eager to get invaded? (a favorite horse of mine: I bet in 2004 that the US would invade Saudi arabia before 2010: come on bessy!) It seems that moving away from WTI and NYME would make it a lot easier to price oil in something other than dollars. I've had to hear about the damned iranian oil bourse since 2003 (of course, Iran is now claiming they sell most of their oil in non-dollar trades w/o a bourse) and Saudi Arabia does this WTI switcheroo in a day. now you are playing with power!

[GRG55]

Re: Saudis drop WTI benchmark

Yeah, if the commodity wonks could weigh in here. What does this do to oil etf's like DBO?

[I was in a russian emerging stock thing when Russia banned investment in like half of its economy (maybe two years ago?) and the fund lost 10% in a day. See I'm lucky like that. (Another good one, I was mega-long nat. gas the day the Marcellus Shale story broke; I'm a lover of life what can I say). So this is just to say, I always keep events like this WTI thing in mind when investing.]

As for the geo-political thing. Is Saudi Arabia eager to get invaded? (a favorite horse of mine: I bet in 2004 that the US would invade Saudi arabia before 2010: come on bessy!) It seems that moving away from WTI and NYME would make it a lot easier to price oil in something other than dollars. I've had to hear about the damned iranian oil bourse since 2003 (of course, Iran is now claiming they sell most of their oil in non-dollar trades w/o a bourse) and Saudi Arabia does this WTI switcheroo in a day. now you are playing with power!

It's quite difficult to price oil in something other than US Dollars. It's quite easy to buy or sell oil in something other than US Dollars, as long as that something is freely exchangable for US Dollars.

All the benchmark references are in US Dollars, including the indices being sponsored by Platts and Argus as an alternate to WTI. Once again, although Iran is selling oil in currencies other than Dollars, the oil is priced against benchmarks that are in US Dollars.

One threat to the use of US Dollars for commodity trade is probably the increasing number of bilateral trade arrangements being made, such as the ones recently announced between China - Brazil, China - Russia, and China - Turkey - Iran.

[Verdred]

Re: Saudis drop WTI benchmark

It's quite difficult to price oil in something other than US Dollars. It's quite easy to buy or sell oil in something other than US Dollars, as long as that something is freely exchangable for US Dollars.

All the benchmark references are in US Dollars, including the indices being sponsored by Platts and Argus as an alternate to WTI. Once again, although Iran is selling oil in currencies other than Dollars, the oil is priced against benchmarks that are in US Dollars.

One threat to the use of US Dollars for commodity trade is probably the increasing number of bilateral trade arrangements being made, such as the ones recently announced between China - Brazil, China - Russia, and China - Turkey - Iran.

I'll see your point on that word, but I wonder if you disagree with the essence of the statement, that moving the location where all the contracts flow through (NY) is setting up the potential DOWN THE ROAD to move away from the dollar. Liquidity, reserve currency, etc.

As for the "price" issue, I'm not exactly sure I'm even wrong to use that word (even though you are right that it isn't what I meant ). The fact that the PRICE of oil keeps going up and down so volatally (is that a word?) in US dollars seems to be THE VERY REASON for the switch. So I guess I'm asking, why again are they switching away from the WTI? Isn't the "price" of a dollar part of the problem with the "price" of oil?:confused: Thanks GRG55! Say "brrrpbrrpbrp" to the chickens for me.

[GRG55]

Re: Saudis drop WTI benchmark

I'll see your point on that word, but I wonder if you disagree with the essence of the statement, that moving the location where all the contracts flow through (NY) is setting up the potential DOWN THE ROAD to move away from the dollar. Liquidity, reserve currency, etc.

As for the "price" issue, I'm not exactly sure I'm even wrong to use that word (even though you are right that it isn't what I meant ). The fact that the PRICE of oil keeps going up and down so volatally (is that a word?) in US dollars seems to be THE VERY REASON for the switch. So I guess I'm asking, why again are they switching away from the WTI? Isn't the "price" of a dollar part of the problem with the "price" of oil?:confused: Thanks GRG55! Say "brrrpbrrpbrp" to the chickens for me.

There is absolutely no doubt that the near-monopoly of commodity trading that the USA has long enjoyed through its exchanges in NY and Chicago is finally under serious attack. But the oil trading that is done in London, Singapore and Dubai is still referenced to US Dollars...for now

Switching from WTI to another US Dollar oil reference won't do anything to address US Dollar priced oil volatility. Aramco is moving away from WTI referenced oil pricing, not away from US Dollar related oil pricing. Again...for now .

[mooncliff]

Re: Saudis drop WTI benchmark

The exchange moved quickly to assure its customers that it would launch two products linked to the new Argus sour crudes index. But the new benchmark will not be so inextricably wedded to the famous Wall Street exchange.

In practice, the shift may not after all make an immediate difference. But all oil market observers will wait to see whether the Saudis really do get a better, more stable price for their oil with the benchmark of sour crudes. Brazil, Venezuela and even Canada could all follow suit if they see that Saudi Aramco has made a smart move.

Some analysts even believe that a total shake-up of global oil pricing benchmarks is possible. There have been signs that the Saudis are looking to experiment with different ways of getting better returns, frustrated by the refusal of Western exchanges to reform the way that oil is priced and sold.

http://www.telegraph.co.uk/finance/m...roy-NYMEX.html