Large energy traders who trade the oil cargoes that form the basis of the Brent benchmark have used an obscure clause to reroute U.S. cargoes from Europe, a practice that raises doubts about the success of the benchmark’s reforms. crude price.
Brent, the most important benchmark in commodity markets, is used to price more than 60% of crude oil traded globally and underpins oil futures contracts. Its value influences the fuel prices paid by consumers and businesses.
Adding U.S. crude to the benchmark in 2023 could limit opportunities for deals that could distort Brent prices, analysts said at the time. But the changes have renewed market concerns about how the benchmark index reflects supply and demand.
Last year, Platts, a unit of S&P Global Commodity Insights, allowed the inclusion of U.S. WTI Midland crude delivered to Europe in its assessment of the price of Brent, called Dated Brent. The move was aimed at increasing liquidity as reserves of mature North Sea Brent and other oil fields have declined.
But in recent months, some WTI shipments negotiated for delivery to Europe through the Platts system, known as the “window,” never arrived, said at least five trade sources, who declined to be named because that they were not authorized to speak publicly. The subsequent rerouting has not been previously reported.
Trading companies that deal with U.S. oil have used a clause in the Platts methodology for all commodities, called a bookout, to change destinations from Europe to Asia or to keep oil in the United States.
Although permitted under the Platts rules, the sale and subsequent rerouting of cargoes can impact prices, including that of dated Brent, traders and industry analysts said, because they give the impression that demand in Europe is stronger than it actually is.
Reuters was, however, unable to conclusively link cargo trading activity to prices during this period.
“The problem is that traders monitor deliveries and count the barrels that arrive in Europe. These barrels set the date for Brent,” said Adi Imsirovic, a trader who has published books and articles on Brent and who runs consultancy Surrey Clean Energy.
“If you then tally up those transactions, the barrels – which you thought were plentiful and already have the dated price – suddenly disappear.
Platts said it had not received any complaints about the practice and was aware that a “small minority of cargoes” had changed their basis of sale from a cost, insurance and freight (CIF) basis. to a free on board (FOB) base, which can go anywhere.
“Such contract changes are common in many markets,” said Joel Hanley of S&P Global Commodity Insights.
NO DISCLOSURE PLAN
Trading firms Trafigura, Gunvor and Vitol are among those that have used reservations to change the destinations of WTI cargoes swapped for dated Brent, according to trading sources.
A Trafigura spokesperson said: “As set out in the Platts methodology and as everyone in the industry does, we seek to respond to our buyers’ requests for additional offloading options when market forces force a reorientation cargoes.
Gunvor and Vitol declined to comment.
Platts estimates the price of dated Brent based on the lowest price of five North Sea crudes – Brent, Forties, Oseberg, Ekofisk and Troll – and WTI Midland on that day.
Thomson Reuters competes with Platts in providing oil market information and pricing assessments.
Mr Imsirovic said Platts should be informed if physical Brent transactions are canceled, because if the original transaction fixed the price, Platts may need to adjust the valuation.
Platts has no plans to make CIF/FOB conversions transparent by publishing them or to retroactively change its assessments if cargoes change destinations, Hanley said.
He added that mutual post-trade agreements are normal practice and that the fair value of oil delivered to Europe was reflected on the day by the CIF trade.
The U.S. regulator, the Commodity Futures Trading Commission (CFTC), declined to comment, as did the European Securities and Markets Authority (ESMA), which referred Reuters to the Netherlands Securities and Markets Authority ( AFM).
The AFM declined to comment, explaining that the Platts crude oil benchmark did not fall under the EU benchmark regulation and that the AFM did not supervise it.
SHIPPING TO CHINA
In a WTI transaction that was booked, Trafigura sold three cargoes for delivery to Rotterdam on October 2, 2023 and subsequently negotiated a change of destination to China, according to trade sources.
On the day, spreads between Forties, Brent and WTI and dated Brent rose due to strong demand, with Forties reaching its highest level in over a year, according to LSG data. According to Platts, WTI and Brent were the cheapest grades and helped establish the price of dated Brent.
Brent crude oil futures fell almost 5% and dated Brent as priced by Platts fell 1.8% to $94.555 on October 2.
Other trading companies, including Vitol and Gunvor, have since purchased 700,000-barrel cargoes of WTI delivered to Europe, which were then converted to FOB, according to the sources.
Reuters could not quantify the exact number of shipments affected. Platts said he had seen six cases of cargoes moving from CIF to FOB in 2024 to be combined into a larger vessel.
Jorge Montepeque, who developed dated Brent and later left Platts to criticize the addition of WTI, also said changes in cargo destinations needed to be disclosed.
“It could be argued that traders’ offers for WTI cargoes contributed to distorting the perception of demand in Europe, where there was no demand for such cargoes,” he said.
Mr Hanley of Platts disagrees: it is not possible to give the impression that demand is greater than it is in terms of price, because if you make an offer higher, a seller will accept it.
