North Sea Crude Liquidity Soars on Platts Quality Premium

Trading in two North Sea crudes has jumped almost eightfold on the Platts platform after quality premiums were introduced to boost liquidity and enhance Dated Brent’s stature as a global oil benchmark.

Oseberg and Ekofisk cargoes were bid, offered and traded by identified companies 64 times in what’s known as the Platts window from May to July, up from eight in the first four months of the year, data provided by the price publisher show.

Platts introduced premiums, or escalators, for the two Norwegian blends on May 1 to reflect their superior quality, so giving sellers an incentive to offer them on the platform and reduce the dominance of Forties among the four grades that comprise Dated Brent. The changes were the latest to be adopted as waning North Sea output threatens the validity of a marker used to price more than half the world’s crude.

“The escalators have had an impact on how people view the benchmark,” Amrita Sen, chief oil market strategist at Energy Aspects Ltd., a research company in London, said in an interview. “Platts have taken steps so that Brent isn’t accused of being a benchmark with no liquidity. We’ve moved beyond the point where people are skeptical.”

Traders buy and sell forward contracts that can be settled with Brent, Forties, Oseberg or Ekofisk crudes, the four streams that comprise the BFOE market, the industry’s most active forward market and used to formulate Dated Brent. The cheapest of the grades, typically Forties, which is also the most abundant, sets the marker.

Quality Premium

Platts, a unit of New York-based McGraw Hill Financial Inc., introduced escalators as a means of compensating sellers for settling contracts with higher-quality Oseberg and Ekofisk. If a buyer receives one of the two grades through a forward contract, it’s obliged to pay the seller a premium as set on a monthly basis using specified percentages of average historical differentials. The company set the Oseberg premium at 49.21 cents a barrel for September and Ekofisk at 40.95 cents.

Waning production has prompted Platts to modify its key benchmark on at least five occasions since it started assessing Dated Brent in the 1980s. A decline in output from the Brent field, initially the benchmark’s only underlying crude, led the company to add Forties and Oseberg to the Dated Brent pricing mechanism in 2002. Ekofisk was added five years later. Platts’s crude prices currently reflect the value of cargoes loading in 10 to 25 days, a date range that the company widened on two occasions to increase liquidity.

Physical Liquidity

“Physical liquidity of the four Dated Brent components continues to dry up in line with actual production levels of the crudes,” Alexander Poegl, an analyst at Vienna-based JBC Energy GmbH, said in an e-mailed response to questions.

Loadings of North Sea BFOE crudes were 832,258 barrels a day from January to July this year, according to data compiled by Bloomberg. That compares with 1.06 million barrels in the same period of 2011.

Brent overtook West Texas Intermediate as the most-traded crude last year as investors viewed the North Sea grade as more representative of global conditions. While Brent continued being shipped around the world, booming U.S. production and a lack of pipelines created a glut of WTI at Cushing, Oklahoma, America’s biggest oil hub, driving its price below Brent and prompting Citigroup Inc.’s Ed Morse to describe WTI as a “broken” benchmark.

The concept of quality premiums already exists in the shape of a de-escalator, a discount Forties buyers get in compensation for high levels of sulfur in the grade, which was introduced in 2007 after supply from the 200,000 barrel-a-day Buzzard field was added.

Increased Transparency

“We have seen, as a direct result, increased transparency and market participation in Oseberg and Ekofisk since May,” Jorge Montepeque, the global director of market reporting at Platts in London, said in an e-mailed response to questions on July 5. “Several cargoes have traded and bids and offers for Oseberg and Ekofisk are now commonplace in addition to normal bids and offers for Forties and Brent.”

The way Platts assesses the physical markets contrasts with the settlements for exchange-traded futures such as WTI, which are bought and sold almost around the clock and made publicly available. Platts uses transactions made in a Market-on-Close window that ends at 4:30 p.m. London time each weekday. Reporters also interview market participants to determine the price of energy products hat trade outside of the window. Only Platts customers can view it and companies must register in order to post bids and offers.

Oil Probe

EU investigators raided the offices of Platts, as well as Royal Dutch Shell Plc, BP Plc and Statoil ASA in May as part of a probe into potential price manipulation in crude, refined products and biofuels. Trading houses Vitol Group, Glencore Xstrata Plc and Gunvor Group Ltd. were asked to provide information to European regulators, said three people familiar with the situation, who asked not to be identified because the matter is private. Platts said it has provided data and is cooperating with the inquiry.

Participation in the Platts window is voluntary, with the bulk of crude trades occurring outside it. From May to July this year, 39 BFOE cargoes traded in the window, 29 of which were Forties, according to Platts data. That’s less than one-third of the 126 BFOE lots scheduled in loading programs obtained by Bloomberg News for the same period. Each shipment can change hands between as little as once and as many as 50 times in the forward market, five traders involved in the market said.

Troll, Statfjord

Platts’s assessments haven’t become more accurate since the escalators were introduced, according to seven of 18 market participants surveyed last month by Bloomberg. A further three of those polled said accuracy has improved, while two said it’s too early to evaluate the changes. The remaining six traders declined to comment.

Platts has said it may further expand the BFOE basket, possibly to include Denmark’s Dansk Underground Consortium and Norway’s Troll and Statfjord. While such moves would increase trading volume underpinning Dated Brent, total North Sea oil output is about 50 percent less than what it was 10 years ago.

“This is quite a dramatic shift in liquidity in few years,” Torbjoern Kjus, a senior oil analyst at DnB ASA in Oslo, said in e-mailed comments “More has to be done on this issue to secure best possible price discovery.”

Bloomberg LP, the parent of Bloomberg News, competes with Platts in providing news and data on energy markets.

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