Mixing determination and creative thinking, Trafigura speculates that a combination of its Corpus Christi terminal and the wider hub will enable Platts to basket U.S. crude in its Dated Brent benchmark and without curtailing trade in the process.
Essential to the global oil system, the European Brent benchmark is utilized in pricing over 50% of the globe’s crude supply. Based on the monetary value of five North Sea crude grades, Forties, Brent, Oseberg, Ekofisk and Troll all formulate the benchmark.
With S&P Global Platts establishing the benchmark on a daily basis, the icon responded to the depleting North Sea basin output. Initiating a summit of discussion with the oil market, Platts focused on liquidity concerns prior to issuing the astounding announcement.
Although the proposal to encompass U.S. crude WTI Midland in the benchmark was expected by most entities, changing shipping standards for the entire index, as well as Midland, caught constituents off guard. Destination adaptability concerns paired with the loss of cargo worth left the palate tainted, to say the least.
As of today, the benchmark is calculated without freight costs, but Platts is planning for deviation. Shifting to a CIF-based benchmark, cargoes would include those costs of insurance and freighting fees. Additionally, Platt will publish a FOB version netbacked from the novel CIF benchmark.
One of the largest U.S. traders of oil, Trafigura, dispersed a letter to global participants and suggested allocating a WTI Midland loading program on a FOB status from Corpus Christi, TX. Offering impressive capacity, Trafigura’s Corpus Christi terminal offers the loading ability of approximately 500,000 to 600,000 barrels per day (bpd). Further solidifying the upside, the hub has several other loading terminals that can export a combined 2 million bpd.
“The market is used to a FOB delivery mechanism — and as such, this allows this relationship to continue. A FOB programme is far more transparent than a CIF system,” the letter said.
With a looming start date of July 2022, Platts’ new system ensures Brent futures are linked to dated Brent. Every second barrel of oil traded globally stands to have its value seriously impacted. This new system further stipulates additional shipping costs would need to be paid from the United States to the European oil hub, Rotterdam. Only after payment is rendered can the cargo continue along its travel path. Adding an additional twist, companies loading the oil will be granted the ability to determine what happens to it. This also includes bidding and offering that oil on a CIF basis if desired.
“CIF Midland can still trade using exactly the same basis as we intended, and those that take delivery of FOB Midland … will own a barrel they can market globally and elect to offer in the dated window if that makes the most sense. Whereas CIF cash is basically a destination restricted barrel.”
The Corpus Conundrum
While constant cargoes of Midland WTI crude oil compete on a global scale, the demand for crude leaving Corpus Christi is additionally global. Comparing these crude sales to others in the world, the benchmark of global crude quality is established. Displaying significant importance, WTI is traditionally priced at Cushing, Ok. This poses an interesting development as the Corpus Christi market is measured against crude from around the world.
“Price transparency in Corpus Christi is the logical next step toward establishing a global oil index. As the largest gateway for U.S. crude exports, Corpus Christie has been designed with liquidity and price transparency in mind,” said Sean Strawbridge, CEO of the Port of Corpus Christi. “Infrastructure investments over the last few years in pipelines, storage, and marine terminal capacities have created a major inflection point in global crude sourcing and trade lanes. Trafigura’s established access to these infrastructure investments positions them and many other equity barrel owners as a global force in this emerging U.S. trading index for the foreseeable future.”
Opposition but no response
Recognizing the market’s surprise and upset with the recent news, Platts offered an apology and stated it would host seminars in the near future to clarify details. Along with Trafigura, Platts, however, made no other comments on the subject.
“The suddenness of the announced changes and the lack of further consultation have caused anger and frustration for some, and we’re sorry for that,” said Vera Blei, global director of oil markets.
Providing for a seemingly parallel universe, the Intercontinental Exchange has considered operating a similar scenario, which would identify as a FOB version of the new Dated Brent contract along with the new CIF Dated Brent. Time will tell how markets fare, but in an age of innovation and creative thinking, anything is possible.