New Oil Price Benchmark Gathers Steam as Saudis Sign On
October 29th, 2009 | File Under : Oil and Gas - Petroleum
A new U.S. oil pricing benchmark is rapidly taking shape, threatening to further erode the dominance of the Nymex crude futures contract.
Argus Media said Wednesday its Sour Crude Index will be adopted by Saudi Aramco to set prices for oil sold in the U.S., in a move away from a formula tied closely to light, sweet crude futures traded on the New York Mercantile Exchange.
The backing of the world’s biggest oil exporter gives new clout to the five-month-old benchmark, and to the Gulf Coast market where the oil tracked in the Argus index is delivered. Argus and rival Platts have argued for years without gaining much headway that growing production in the Gulf of Mexico makes the region better-suited for setting oil prices than Cushing, Okla., the delivery point for barrels underpinning the Nymex futures contract.
Aramco’s shift could eventually lead to lower trading volume for the Nymex contract if their customers, such as refiners, no longer see Cushing-delivered as adequately protecting against price volatility. CME Group Inc., which owns Nymex, plans to introduce a new derivative by the end of the year to capitalize on the early success of the Argus index, said Bob Levin, the exchange operator’s managing director for energy research and product development.
The Nymex contract is “still the world’s most liquid, leading crude oil benchmark,” and that is unlikely to change even as new indexes gain traction, Mr. Levin said.
Argus insists its index acts to complement, rather than rival, the Nymex contract. Momentum began to build for a Gulf Coast benchmark early in the year, when weak U.S. demand caused inventories to swell at Cushing. Nymex futures prices came under attack from would-be rivals like Argus for appearing to reflect tight storage conditions in the U.S. Midwest, rather than the global supply picture. Oil from the Gulf of Mexico has several potential delivery points and more pipeline routes out of the region, making a storage crunch less likely.
Mr. Levin said he hoped CME’s new derivative based off the Argus index would resemble the Oman crude futures contract offered on the Dubai Mercantile Exchange and traded through CME’s Globex electronic platform. That contract has brought new volume to CME, particularly through trading on the gap in price between Oman and other benchmarks, Levin said. The Argus and Oman benchmarks also bring some diversity to the oil market by tracking sour crude, which is of a lower quality than the sweet oil blends delivered to Cushing.
“We’ve been wanting to get a U.S. Gulf (sour benchmark) going, we’re very supportive of them,” Mr. Levin said. “The world doesn’t just trade one type of product, there are hundreds of (crude) streams .. it needs more than one pivot.”
The Argus index isn’t a total departure from the Nymex contract, either. Each of the three blends of Gulf of Mexico crude in the index are in turn priced off of the Cushing benchmark.
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