The Problems with Brent

The international oil community uses an oil price benchmark, Brent, which sets the price of physical, forward, futures, swaps and options contracts throughout the world. Brent has been on a declining production trajectory for more than 20 years exposing it to potential price squeezes and manipulation, the impact of which is magnified by the number of contracts that are calculated using formulae that refer to one of more of the Brent price indices. To shore up the number of physical cargoes available to inform the price-setting process the industry has added alternative grades of oil that can be delivered if Brent availability is squeezed so that its price exceeds its reasonable market value, as evidenced by the price of competing grades. Hence we now have a Brent basket– currently Brent, Forties, Oseberg and Ekofisk (BFOE)-  to boost the number of cargoes that can be delivered into the 30-Day BFOE forward contract and to inform the physical, wet cargo Dated BFOE price discovery process. There are a number of problems with this existing situation: The production content of the BFOE basket has continued to decline such that there is a prospect of the price again becoming open to manipulation. More production needs to be added to the basket to augment the deal evidence on which price assessments are based. As the existing BFOE basket demonstrates, the more dissimilar are the grades of crude oil added to the basket, the less keen are companies to trade the contract without some form of adjustment to compensate them when they have to give or receive delivery of Forties, Oseberg or Ekofisk, rather than Brent. Forties is much higher in sulphur than the other three grades that can be delivered into the 30-Day BFOE contract and therefore it usually has the lowest price. So if a trader buys a BFOE cargo it is likely to receive a Forties cargo. The forward contract provides that the trader will be compensated for the higher sulphur content of Forties compared with Brent, Oseberg or Ekofisk, in accordance with a sulphur de-escalator price adjustment formula set by Platts. There is no corresponding sulphur escalator applied if a Forties cargo with an unusually low sulphur content is supplied, for example when the high sulphur Buzzard field is shut in for maintenance or other reasons and does not therefore form part of the Forties Blend stream temporarily. Leaving aside the sulphur price de-escalator, Forties is still usually the cheapest grade in the basket of four and is therefore the grade that is normally delivered into the 30-Day BFOE contract. A rational supplier will always deliver the cheapest grade possible when it has the option to do so. But sometimes there...

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