Saudi Aramco, national oil company of the world's largest oil producer and exporter, decided earlier this month it will drop
West Texas Intermediate (WTI) as the benchmark for pricing its oil for sale in the US market.
In January 2010, Aramco will use the
Argus Sour Crude Index (ASCI) to price its oil for the market; it's heavier and has higher sulfur content than WTI. The index, launched in May, uses the volume-weighted average of daily spot sales of the three U.S. Gulf Coast medium sour crudes: Mars, Poseidon, and Southern Green Canyon.
The news instantly sparked speculation that other major producers would follow. Chavez (not surprisingly), reportedly already indicated Venezuela would follow Saudi's lead adopting the new index. Several Canadian companies, who expect to use TransCanada Corp. (TRP) proposed Keystone XL pipeline to send oil sands crude to the U.S. Gulf Coast, have also expressed interest in using the Argus benchmark.
Global Crude Oil Benchmarks
Crude oil benchmarks, also known as oil markers, were first introduced in the mid 1980s. There are three primary benchmarks,
WTI,
Brent, and
Dubai. WTI, a lighter and sweeter crude, usually trades at a premium to Brent and Dubai. Benchmarks are used because there are many different varieties and grades of crude oil (around 200 different blends). Using them is a way to give
stability and
transparency to the global oil market.
While Brent remains the dominant benchmark for oil pricing outside the US, the U.S. oil imports are usually priced off WTI. As much as three quarters of the world's physical oil is priced each day using Brent and WTI. Saudi Aramco has priced its U.S. deliveries against WTI since 1994.
Shifting Energy Landscape
US Gulf oil output, currently at about 1.2mn b/d, is expected to climb to 1.4mn b/d next year and 1.9mn b/d in 2013 boosting spot market trading volumes. This decision by Aramco in part demonstrates the emerging importance of the US Gulf as the new center for price discovery.
Meanwhile, the abandonment of WTI, a longtime standard since the 1980's, for a five-month-old Argus index by Saudi Arabia is a big deal in the crude pricing assessment world. The move not only highlights some specific problems of WTI, but also signifies ongoing shifts in the global energy landscape, as emerging countries take an increasingly prominent role in the oil trade.
Guilty by Disassociation
In principle, the movement in WTI prices is supposed to reflect supply-demand conditions in the US, the largest consumer in the world, burning almost one quarter of the of the
86.14 million b/d consumed worldwide in 2007. And sour crudes usually should sell at a discount to light crudes such as WTI because the latter are cheaper to refine.
However, distortions caused by logistical or inventory constraints at
Cushing, Oklahoma, the WTI delivery and pricing point, can dislocate WTI prices away from North Sea Brent and US gulf crude prices.
Historically, WTI has traded pretty much in line with Brent and gulf sour crudes. But WTI price movement has become increasingly volatile in recent years.
