Thursday, October 29, 2009

Don't Cry for WTI

Oil market pricing formulae and the benchmarks used in those formulae change over time as crude production that had been the basis for individual wells declines or the components of a blend change. Changes also occur when what is perceived to be an improved benchmark emerges.

A number of years ago, Saudi Aramco ceased using the day-end settlement of ICE Brent crude as a benchmark and switched to using a weighted average of Brent prices throughout each trading day. This new benchmark is called BWAVE (Brent Weighted Average).

Now, Saudi Aramco (which is a larger player among the hundreds of oil companies using WTI and other benchmarks) is switching from using Platts WTI to using Argus, a Platts competitor's, benchmark for US gulf coast sour crude.

The New York Mercantile Exchange (NYMEX) has tried in the past to launch a sour crude futures contract to compliment its less sour WTI. This may now give life to such an effort. A few years from now there may be two highly liquid US futures - WTI and Gulf Coast Sour.

Some have mentioned that this is a snub of NYMEX WTI futures or proof that WTI is "broken". On the contrary, I see this as a natural progression and fine tuning of benchmarks and formulae over time and something the NYMEX itself has embraced.

The Saudi decision is more of a win for trade journal Argus over its competitor Platts.

For more on oil pricing and benchmarks see Oil 101.

Thanks to the very interesting heatingoil.com for picking this up.

Update (Oct 30): As expected, the CME (parent of the NYMEX) is going to launch futures contracts based on the Argus Sour Crude Index. My guess is that this Saudi announcement will result in net increased volumes for WTI futures rather than less.