Oil Benchmarks: what next?
For the trading community, 2017’s ‘IP week’ in London (20-23 February) was not just concerned with the forecast level of crude oil prices, but about how those prices are expressed, assessed and reported. Once again the security of international oil price benchmarks is a significant cause for concern. In this comment, Liz Bossley argues that the problem at the core of the Brent market is that, if the contract was functioning as intended, there would be no need for a quality premia to be added to the price of BFOE. It is true that the introduction of the quality premia has increased the incidence of deliveries of Oseberg and Ekofisk into the BFOE contract and has provided the PRAs with sufficient data to continue to assess the prices of the four grades in the basket, markets do not exist just to provide data to PRAs: They exist to provide the necessary tools for companies to buy and sell physical oil and to manage their risk. It is argued that whether or not Troll ends up in the BFOE basket, this issue will not go away: Brent, Forties, Oseberg, Ekofisk and Troll are all on a declining production trend, suggesting that more and increasingly disparate grades of crude oil will have to be added to the basket over time. The author recommends that the oil industry takes a step back and address the imperfection at the heart of the Brent basket mechanism otherwise the market will continue to forego the liquidity that could be enjoyed if Brent were functioning properly. She warns that the industry is not spoiled for the choice of other oil price benchmarks and therefore urges the players for cooperation and ingenuity in order to cure the Brent benchmark.