Yields vs. sulfur: What is driving crude benchmarks in 2020?
The widespread and completely unforeseen impact of a global pandemic on demand for road fuels has been most clearly seen through a stark decline in gasoline prices. One hypothesis put forward has been that no longer should the market focus on the sweet-sour spread, but instead the core question should be light versus heavy – or the spread between crudes that produce a lot of gasoline, and those that produce more diesel or other heavier products. In the ‘new normal’, sulfur is suddenly irrelevant, and benchmarks should be constructed to a particular yield instead.
The core question for crude benchmarks is really what a crude benchmark should represent, particularly the Asian crude benchmarks, Dubai and Oman. Should they be based on a defined yield, or the broad, traditional definitions that have been foundational to spot trading and term contracts, sulfur and gravity?
To attempt an answer to this question this paper starts with benchmark definitions and a historical review of the Middle East crude benchmarks, and the crudes they represent. Then it considers the changes made over the decades, and their impact on the benchmarks. It reviews the core relationships between global crude benchmarks and exchange-traded contracts, including the latest addition to the field, China’s INE crude oil futures contract. It then examines the relationship between refinery values and spot crude prices. Finally, it provides a synthesis of these areas and some tentative conclusions.