Big energy merchants trading oil cargoes that form the basis of the Brent benchmark have used an obscure clause to reroute US shipments from Europe, in a practice that raises doubts over whether reforms to the crude price marker have succeeded.
Brent, the most significant benchmark across commodity markets, is used to price more than 60% of globally traded crude and underpins oil futures. Its value affects fuel prices paid by consumers and businesses.
The 2023 addition of US crude to the benchmark had the potential to limit the scope for trading plays that can distort Brent prices, analysts said at the time. But the reroutings have renewed concern in the market about how well the benchmark reflects supply and demand.
Platts, a unit of S&P Global Commodity Insights, last year allowed US WTI Midland crude delivered to Europe to be included in its Brent price assessment, called dated Brent. This was to boost liquidity as supplies from the mature North Sea Brent and other oilfields have dwindled.
But in recent months, some WTI cargoes that traded for delivery to Europe via the Platts system, known as the window, never arrived, at least five trading sources said, declining to be named because they were not authorised to speak publicly. The later rerouting has not been previously reported.
Trading companies that deal in the US oil used a clause in the Platts methodology for all commodities, called bookout, to change destinations from Europe to Asia or to keep oil in the United States.
Although allowed under Platts’ rules, the sale and later rerouting of the cargoes can impact prices including that of dated Brent, traders and industry analysts said, because it creates a perception demand in Europe is stronger than it is.
Reuters has not, however, been able to establish any conclusive link between the cargo trading activity and prices over the period.
“The issue is traders watch the delivered trades and count barrels arriving to Europe. Those barrels set dated Brent,” said Adi Imsirovic, a trader, who has published books and papers on Brent and runs consultancy Surrey Clean Energy.
“If you then book out those trades, the barrels – which you think there were plenty of, and which have already set the dated price – suddenly disappear.”
Platts said it had not received any complaints about the practice and it was aware “a small minority of cargoes” changed their sales basis from a delivered cost, insurance and freight (CIF) basis to free on board (FOB), which can go anywhere.
“Such contract amendments are typical in many markets,” Joel Hanley of S&P Global Commodity Insights said.
Trading firms Trafigura, Gunvor and Vitol are among those that have used bookouts to change the destinations of WTI cargoes traded into dated Brent, the trade sources said.
A Trafigura spokesperson said: “As set out in the Platts methodology and is common across industry participants, we seek to agree requests from our buyers for additional discharge options where market forces dictate re-direction of cargoes.”
Gunvor and Vitol declined to comment.
Platts assesses dated Brent’s price based on the cheapest of five North Sea crudes – Brent, Forties, Oseberg, Ekofisk and Troll – and WTI Midland on the day.
Thomson Reuters competes with Platts in the provision of news and price assessments about the oil market.
Imsirovic said Platts should be informed if physical Brent trades are booked out because if the original deal set the price, Platts may need to adjust the assessment.—Reuters
Florence Tan, Alex Lawler and Robert Harvey, "Brent oil traders use little known rule to reroute US cargoes," Business recorder. 2024-10-02.Keywords: Social sciences , Brent benchmark , Oil cargoes , Oil futures , Price assessment , Trafigura , Oil market , Platts , Europe , Adi Imsirovic , Joel Hanley , United States , Asia , US , WTI , FOB