The adequacy of Brent crude to continue serving as a world oil price benchmark was called into question Sept. 7 at the World Energy Congress in Sydney, and two delegates proposed establishing Persian Gulf crudes as a new benchmark.
Despite Brent crude's having developed a full range of paper instruments in the futures market, the UK North Sea field has gone into a notable production decline, its opponents said, and there is a risk of market manipulation. The extension of the Brent contract to include two other North Sea crudes, Forties and Oseberg, to increase its liquidity is not a satisfactory solution, they said, as the North Sea is a geologically mature area and can account for only a small share of world oil production. It also is representative only of light-sweet crude.
Proper marker lacking
Giampiero Marcello, head of oil market studies at Italy's ENI SPA, pointed out that the largest class of crudes, the medium-sour quality, lacks a proper marker. He said the most common benchmark, Oman-Dubai crude, is illiquid and generally traded at a differential to Brent.
He added that the Persian Gulf market is dominated by five countries—Saudi Arabia, Iraq, the UAE, Kuwait, and Iran—that account for a quarter of world oil production and contain the largest crude oil reserves.
However, the industry in these countries is controlled by national oil companies, which use an official monthly selling price formula that discourages the development of a spot market in these crudes.
Marcello and ENI colleague Alessandro Liberati then proposed a mechanism for the development of a futures market for Persian Gulf crudes.
The system would begin with the national oil companies putting a predefined share of their future production on offer. Buyers would be under no constraints in reselling the acquired crude and thus could optimize their crude slates in terms of timing and quality.
The more producers taking part in the auction the greater would be its success to produce a clear and transparent price mechanism.
Marcello said the proposal does not conflict with the Organization of Petroleum Exporting Countries' desire to control supply by employing volume adjustments.
He proposed introducing the scheme gradually with a small fraction of the region's crude output offered at auction. The volumes would gradually increase, and spot trading activity would grow over time. Consequently, the liquid spot and futures market, like Brent, would become the basis for a medium-sour crude futures contract.
Marcello said Persian Gulf crude is the best candidate for such a contract, particularly as the production of this medium-sour type increases to meet Asia's growing oil demand. He pointed out that if Persian Gulf crude is not used, the market soon would begin to look for an alternative benchmark, such as Russian crude.