By Florence Tan, Siyi Liu and Robert Harvey
SINGAPORE/LONDON, April 1 (Reuters) – The halting of oil exports through the Strait of Hormuz has left the Dubai Middle East benchmark, the price used to value nearly a fifth of global crude supply, in a perilous position.
The Dubai benchmark, used to price 18 million barrels of oil per day, is based on crude produced by the United Arab Emirates, Oman and Qatar and mostly loaded inside the Strait of Hormuz.
However, since the Iran war began with U.S.-Israeli strikes on February 28, most oil shipments have been halted due to the threat of Iranian attacks on traffic through the Strait.
S&P Global Energy Platts, the price setting agency for Brent and Dubai, faces the problem of how to price oil that cannot be loaded from within the Gulf.
Some market participants have told Reuters that the benchmark is effectively broken and have stopped dealing with cargoes priced on Dubai or trading the oil’s derivatives, with many calling for its reform.
CHALLENGES IN PRICING OIL DURING THE CRISIS
This exposes the difficulty of trying to price oil due to be delivered in two months during the world’s worst-ever supply disruption.
It is unclear if and when buyers would be able to load crude from ports inside the Strait of Hormuz, with very few tankers sailing through the choke point since the war began.
As a result, crude in the Middle East hit nearly $170 a barrel, above Brent’s all-time high of $147 in 2008, rapidly raising costs for Asian buyers using the Dubai benchmark.
Some market players are adopting alternative pricing methods, including using different benchmarks. Several Asian refiners are switching pricing for buying U.S. crude oil to one based on a differential to international Brent crude futures.
BENCHMARK GRADES CUT FROM FIVE TO TWO
On March 2, soon after the war began, Platts excluded oil loading inside the Strait, cutting the benchmark to two its five grades of crude — Abu Dhabi Murban shipped from UAE’s Fujairah port, and Oman crude. Platts has said this reduced deliverable crude by about 40%.
Platts, which must continue publishing the Dubai price used to value many crude barrels, said it has engaged in extensive talks with market participants during these unprecedented times.
“Widespread market feedback stressed the need for immediate action to ensure the Platts Dubai benchmark continued to reflect the tradable spot market value of physical crude oil in the Middle East and we are confident in its ability to do so, even through historic moments of volatility,” the agency said in an emailed response to Reuters.
Industry participants have proposed changes to Platts, ranging from halting the Dubai price assessment to reinstating the three crude grades for delivery or introducing other grades from outside the region based on delivered prices to Asia, people with knowledge of the matter said.
“The liquidity of the Dubai benchmark is being threatened and market participants would surely be looking for an update to the methodology,” Sparta Commodities analyst June Goh said.
ASIAN REFINERIES HIT HARD
Higher Dubai prices have hit Asian refineries hard, driving up the price of their main feedstock and therefore the retail price for fuel sales to consumers, Goh added.
Platts’ March 2 change caught market participants by surprise, some said.
Platts typically holds months-long consultations before making any changes and traders were surprised by the swift exclusion of May-loading cargoes during March trading, adding that the benchmark was now not representative of the region.
“It is costing consumers in March tens of billions of dollars, because the Platts numbers published in March are used to price many Asian and remaining Gulf barrels,” said Onyx Capital’s Jorge Montepeque, who led the design of the benchmark while he was at Platts, referring to the spike in the benchmark.
‘BIGGEST OIL MARKET POSITION EVER’?
Platts assesses Dubai prices based on trades conducted during its Market on Close (MOC) process, also known as the window, using partial cargoes of 25,000 barrels each. When two parties complete trade for 20 partials, the seller declares the delivery of a 500,000-barrel cargo from one of the crude grades in the Dubai basket.
Trade data shows TotalEnergies’ trading arm Totsa spent some $4 billion on Dubai partials in March that led to the delivery of 77 cargoes of Oman and Murban crude, totalling 38.5 million barrels, out of the 82 cargoes delivered during the MOC.
TotalEnergies, which declined to comment, dominated purchases throughout March, with Mercuria and Equinor picking up five cargoes on the last trading day, the data showed. Totsa’s dominance added to upward pressure on the Dubai benchmark price.
“This is huge,” said Adi Imsirovic, a veteran oil trader and an authority on benchmarks, of the trading by Totsa.
“Given the overall market situation and the extent of the price increases as well as the volume of oil involved, this might have been the biggest oil market position ever,” he added.
It is not unusual for market participants in physical oil trading to accumulate large positions and this does not contravene any regulations.
Some industry players on the wrong side of price moves will be counting the cost of the sharp rise in the Dubai benchmark, with traders estimating losses ranging from $60 to $100 a barrel, depending on when they covered their short positions.
(Reporting by Florence Tan, Chen Aizhu, Siyi Liu in Singapore, Nidhi Verma in New Delhi and Robert Harvey in London; Editing by Tony Munroe, Simon Webb, Alex Lawler, Alexander Smith and Bernadette Baum)
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