Saudi Aramco abandons the WTI

Saudi Aramco’s decision to abandon the WTI (West Texas Intermediate) benchmark price for its oil exports to the United States could have strong repercussions in the global oil market

Saudi Aramco, Saudia Arabia’s national oil company and the largest exporter of oil in the world, has decided to abandon the West Texas Intermediate (WTI) benchmark price for its exports of crude oil to the United States. WTI, also known as Texas Light Sweet, is a type of crude oil whose rate is used as the benchmark price for exporting crude oil to the United States.

It constitutes the base price of the Future Nymex contracts on the oil exchanged at the New York Mercantile Exchange.

This index, which has dominated North American oil sales for decades and is based on sales of crude oil delivered at Cushing, Oklahoma, constitutes one of the three major global indicators of the price of crude oil.  Other benchmarks include North Sea Brent, based on sales of crude oil in the North Sea, and Omani crude oil, quoted at the Dubai Mercantile Exchange (DME). The former is considered the exchange rate for quotations of raw oil outside the United States.

Saudia Arabia currently fixes official sales prices for American buyers (OPS) based on the Platts price (strictly linked to future Nymex contracts) with a discount or a premium that takes into consideration the quality of the crude oil and price differences compared with Cushing’s.

Another important factor is that the latter has inadequate storage facilities and pipeline networks connecting it with the coast.  As the Nymex prices reflect the price and availability of crude oil at Cushing, they often reflect the lack of adequate physical arbitration, which prevents prices from converging toward those of the international markets.

Therefore, as the Nymex prices have become increasingly less representative of the dynamics of the crude oil market, the structure of the premiums and discounts has become increasingly unstable. Consequently, Saudi Arabia has had to adopt greater variability in defining the OPS to deal with the deficiencies in the exchange rate system.

Starting in January 2010, Saudi Aramco will adopt a measure called the Argus Sour Crude Index (ASCI), which was developed by the London-based company, Argus. The ASCI index, which represents the daily value of medium sour crude oil from the gulf coast of the United States, is an average measured on the volume of the physical spot transactions of three types of medium sour crude oil:  Mars, Poseidon, and Southern Green Canyon.

The latter are extracted from the Gulf of Mexico and are transported by means of oil pipelines to refineries in Texas and Louisiana. Although this benchmark also originates in the United States, it is considered to be more indicative of the global price of crude oil.

The quality of the Saudi Arabian crude oil exported to the United States is similar to the medium-sour oil produced in the Gulf of Mexico, which is inferior to the light-sweet quality and presents higher levels of sulphur than the oil the WTI refers to.  Therefore, Saudi Aramco’s goal is to be able to establish more stable OPS prices and to avoid the need to use predictions about the difference between sour-sweet crude oil in formulating them.

Saudi Aramco’s decision could also encourage other producers to abandon the WTI and, thus, could weaken the control of the Future contracts, which are based on this benchmark price and are those most traded at the global level.  Soon after Saudi Aramco’s announcement, Venezuelian President Hugo Chavez stated that his country would follow suit in adopting the ASCI as the new benchmark for exports of crude oil to the United States.  Interest was also expressed by producers in Canada and Kuwait.

This breakaway reflects the growing dissatisfaction of Saudi Arabia and the other OPEC countries with the WTI and with the speculative tendencies that have generated great instability in oil prices.  Although the decision is considered technical, geopolitical considerations certainly played a part.

One of the first considerations was the procurement difficulty in Cushing, where the oil is consigned, which has generated distortions in the price of oil that have no relation to exchange rates in international markets. In particular, in January depletion of the capacity to accumulate reserves at the terminal generated the illusion of an over-production in international markets when, instead, the excess was localized at the terminal.

This unusual instability generated confusion in the market and irritated the Saudis. Differently from Cushing, the petroleum extracted from the Gulf of Mexico has various consignment points and a greater number of oil pipelines outside the region; thus, it is unusual to find bottlenecks in the warehousing operations.

Furthermore, the WTI is defined as light, sweet crude, which is lighter than that produced by North Sea Brent and different from the type of oil produced by Saudi Aramco, which is primarily an acidic, heavy product, that is, heavy sour crude, and contains sulphur. Thus, the Saudi decision moved toward modifying the commercial offer so as to be able to shape it on the basis of an index, the ASCI, which better reflects the characteristics of the Saudi product.

One of the second considerations was to re-set the global energy panorama so that emerging countries like China and India will have an increasing role.  In fact, it is expected that these countries will emerge to set the growth in demand for crude oil in the future. In fact, different economic analysts hold that the demand for United States’ oil has reached a peak and that the exchange rates for the American market linked to the WTI, which were traditionally at a premium, will soon be discounted with respect to the dominant global prices. Partial confirmation of this trend is the sliding of the WTI price below that of the North Sea Brent price at various times over the past two years.

Autore: Carlo

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