Platts Defers Dated Brent Overhaul

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S&P Global Platts has deferred plans to undertake a major overhaul of its flagship dated Brent assessment, including the addition of West Texas Intermediate (WTI) Midland as a deliverable grade into the North Sea benchmark. The original project, announced on Feb. 22, called for Brent to absorb a certain amount of WTI price and be amended to a c.i.f.-delivered Rotterdam basis, starting in June 2022 (OD Feb.22'21). But after a first round of feedback from market participants, the pricing agency has decided to extend its technical consultation. Overhaul Raises Concerns The planned change has created a fair amount of commotion in North Sea trading circles. The inclusion of WTI and the move to a fully delivered basis -- inclusive of freight -- will involve a complex recalculation process of the forward contracts, some of which have already traded. Smaller market participants still need to hedge their risk on an f.o.b. basis. And since there is not enough liquidity in the North Sea market to hedge f.o.b. risk with a new, separate benchmark, Platts’ decision was bound to create some backlash from potential losers. The assessment on Rotterdam-delivered terms also raises concerns, as the port of Rotterdam has historically held a commanding position on storage. Brent was originally developed as a physically delivered contract. It failed physical delivery twice in the late 1980s, because market players could control the Brent price by controlling storage in Rotterdam. Uncertainty 'Breeds Discontent' Platts will still focus on incorporating WTI Midland into its existing c.i.f. dated Brent assessment for deliveries from July 2022, as previously announced. But the agency will have to clearly spell out the protocols around its assessment sample, and how potential storage squeezes -- like the one that prompted negative WTI prices in April 2020 -- can be avoided (IOD Apr.21'20). “What do you do if there is a concentration of positions, one long or short as a dominant position and the paper price gets destroyed by the physical price?” wondered Albert Helmig, CEO of Grey Line Capital and a former executive at Nymex. It is also unclear how the assessment will affix the proportional premium or discount part of WTI to Brent at contract expiry. WTI expires on the 21st of the month, while Brent contracts expire on the 30th. The spread between the two prices is very dynamic, which will make it hard to decide when the actual monthly settlement of a new Brent-WTI price should take place. “Market participants overreact to how big that valuation shift is, but there is a valuation shift, and it’s unknown what effect it has. So the uncertainty always breeds discontent,” warned Helmig. Julien Mathonniere, London

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