Are the international oil benchmarks in danger?
Although Saudi Arabia is the largest oil exporter in the world, crude oil prices from the Kingdom are linked to regional international benchmarks: ASCI for the US, ICE Brent for Europe and the Average of Oman (as traded on the DME) and Dubai for the Far East.
In early 2018, China launched the Shanghai International Energy Exchange (INE) as a futures exchange priced in the Chinese yuan.
It is fair to say that the launch did not find support by the industry for spot or term crude contracts. To support its currency’s internationalization, China sought to trade the yuan-denominated crude contracts in the non-US dollar exchange to gradually take a leading role in benchmarking crude oil in Asia and worldwide.
This year, the market expects Abu Dhabi National Oil Company (ADNOC) to trade futures contracts of its flagship oil grade in what could eventually become a new price benchmark.
This is supposed to be done on an independent stock exchange. Seemingly, the goal of this mechanism is to make “Murban” crude oil a benchmark just like Brent (ICE) and WTI (NYMEX).
The unforeseen event of an oil contract turning negative for the first time in history like WTI did this week, will attract scrutiny
Why did the May WTI crude expire negative?
The problem occurred only (and it will only happen) in Cushing, Oklahoma (pricing point for WTI), which is a landlocked storage facility. What happened is that storage was full and people that held “May” contracts preferred to sell rather than taking delivery.
They did not want to take delivery because both storage and pipelines were full. In addition, the trucks could not be used because of the lockdown due to the coronavirus pandemic.
Producers, on the other hand, preferred to sell and not to close their production wells, because it costs about $50-60 per barrel to shut the barrel and it would cost much more than that to make the well functional again. In addition, freight rates, to store crude oil on ships, spiked and made storage at sea impractical.
In light of the current oil glut, supply got much bigger than demand and the US suffered.
However, this could never happen to the Brent benchmark as the contract does not envisage physical delivery. Brent is a seaborne crude oil and it is not landlocked like WTI.
Still, the unforeseen event of an oil contract turning negative for the first time in history like WTI did this week, will attract scrutiny and may even raise questions about the viability of some international oil benchmarks.
• Faisal Faeq is an energy and oil marketing adviser. He was formerly with OPEC and Saudi Aramco.