What Next for Asian Benchmarks?

Earlier this month, Saudi Aramco announced that from October 2018 it will be changing the pricing formula it uses to price its long-term crude oil sales to Asia. Rather than using the equally weighted average prices for Dubai and Oman as assessed by pricing agency S&P Global Platts (referred to in this article as Platts Dubai and Platts Oman), Saudi Aramco will replace Platts Oman in the formula with the marker price of the Oman Crude Futures Contract traded on the Dubai Mercantile Exchange (referred to as DME Oman). In terms of pricing, the market will barely feel the difference, as historically Platts Oman and DME Oman have been closely aligned with very little difference on a daily basis. Nevertheless, this recent change could still represent a major shift, as it is the first time that Saudi Arabia, the Middle East’s biggest crude producer and exporter, has shown willingness to implement a change to its Official Selling Price (OSP) to Asia since the mid-1980s, in an attempt to reassert some influence over the crude pricing mechanism and the oil price discovery process. This article puts the recent change in context and discusses some of the main drivers behind this change arguing that Saudi Arabia’s recent adjustment to its pricing formula reflects, in part, recent structural transformations in the oil market and trade flows, together with a growing interdependency between Asia and the Middle East, and thus may indicate that more radical changes could be on the way, though the timing of any potential changes remains highly uncertain.

By: Bassam Fattouh

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