Factors that Influence the Price of Dated Brent …...A Barrel of Brent Factors that Influence the...

A Barrel of Brent

Factors that Influence the Price of Dated Brent Crude Oil

Robert Beaman

Associate Editorial Director, Europe & Africa Oil

S&P Global Platts

May 2019

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Agenda

• Introduction to price reporting

• The Dated Brent benchmark

– Why Brent?

– Brent crude trading

– The role of Platts and other players

– Dated Brent assessments

• Current Market Trends

• Conclusions


Introduction to Price Reporting


Introduction to Platts

• The world’s foremost Price Reporting Agency

• Publisher of commodity prices, news and analysis

• Sister company of S&P Ratings and Dow Jones Indices

• Creator of globally-important Dated Brent benchmark

http://marketintelligence.spglobal.com/

http://eu.spindices.com/indexology/?gclid=CjwKEAiAgavBBRCA7ZbggrLSkUcSJACWDexAscFgsKhh275FrIMuh85EqWGvzOOcsbn5My3ZnXXArBoC57jw_wcB

http://www.crisil.com/index.jsp

http://www.platts.com/


Our Benchmark Price Assessments

5

Term Contracts

OTCDerivatives Futures

SPOT

Focus, impact and relevance

Platts benchmarks are used to price term contracts

Futures settlements are often tied to Platts spot market assessments

Derivatives “price out” against Platts spot price assessments or futures settlements

By standardizing and providing an assessed value for a particular

commodity, Platts price assessments provide a reference point for buyers

and sellers.


Why Brent?


Brent Field Oil Production

• Globally-significant oilfield when at its peak

• High-quality, popular grade of crude oil

• Well-located for delivery to European markets

• Stable UK regulatory and legal regime

• Numerous cargoes of standard size

• Coincided with growth of UK financial sector

• Provided point of comparison with other grades

• Rapid production decline in early 1990s

• Required supplementing with additional grades

-

100,000

200,000

300,000

400,000

500,000

600,000

Brent Field Production, b/d


The BFOE Crudes

8

Sullom Voe

Hound Point

Sture

Teesside

Rotterdam

BRENT

FORTIES

OSEBERG

EKOFISK

TROLL

R’DAM

“Originally an assessment of

Brent Blend cargoes loading

between 7-15 days from the

date of publication, Dated

Brent has evolved into a

complex assessment of a

range of physical North Sea

crude oil cargoes, including

Brent, Forties, Troll, Oseberg,

and Ekofisk. The assessment

currently reflects cargoes

loading between 10 days and

one month from the date of

publication, in line with typical

trading patterns for North

Sea crude oil.”

Mongstad


Brent Market Instruments

Cash BFOE (1983-1985)

Partials of 100,000 bbl

deliverable as Dated when

combined to 600,000 bbl

ICE Brent Futures (1988)

Derivative contract based on

Cash BFOE price on “expiry

day”, the last day of month

Dated Brent (1983)

Price assessment of physical

600,000 bbl cargoes loading

10 days-1 month ahead

Brent CFD (1988-1992)

100,000 bbl swaps contract

used to hedge Dated Brent/

Cash BFOE spread

Brent EFP (after 1988)


used to move exposure

between Futures/Cash BFOE

Brent DFL (1990s)


used to hedge Dated Brent/

ICE Brent Futures spread

Futures settle

on Cash BFOE

Cash BFOE

delivered into Dated


Changes to the Dated Brent assessment

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• 1976: First oil from the Brent field

• 1985: Launch of Cash Brent

• 1987: Launch of Dated Brent

• 1999: Launch of Brent CFDs

• 2001: Brent Strips assessed

• 2002: Forties/Oseberg included

• 2002: 21-day Brent market

• 2007: Forties sulfur de-escalator

• 2007: Ekofisk included

• 2012: 25-day Brent market

• 2013: Quality Premiums launched

• 2015: Month ahead Brent market

• 2016: CIF Rotterdam launched

• 2017: Troll included

• 2018: Daily program updates

• 2019: CIF inclusion in Dated Brent

First Wave1985-2002

Second Wave2002-2016

Third Wave2016-


How does Dated Brent trade?


North Sea Cargo Trading (Forties example)

• Trading starts one month before loading

• Physical trading based on loading programs

– Crude divided into individual 600,000 cargoes

– Sold for loading onto a ship at Hound Point

– Trading stops about 10 days before loading

• Loading programs change regularly

• Republished by Platts on a daily basis

• Priced as a premium/discount to Dated Brent

Source: Petroineos


CASE STUDY: Price Reporting Agencies

• Publish prices for specific commodities

• Assessments made using established methodology

• Information sourced from market and processed

• Prices used by market participants for various purposes:

– Indicative information for analysis and planning

– Internal benchmarking and mark-to-market

– Basis of external trading contracts

– Underlying value for derivatives contracts

• Not all price assessments become benchmarks

• Benchmarks used by third parties voluntarily

• Access to PRA information is via paid subscription

• PRAs often also provide market news and forecasts


North Sea Crude Traders

• Geneva and London-based

• Trading Houses and Majors

• Physical and Paper markets

• Equity and contract holders

• Changing market positions


The Price of Individual Cargoes

• Cargoes trade/price based on loading date

• North Sea prices 2-1-2 around loading

• Cargo loading Jun 5 prices Jun 3-4-5-6-7

• Dated Brent price averaged for this period

• Differential added to final Dated Brent price

• Dated Brent component can be hedged

• Differential reflects physical market factors

– Crude quality

– Supply and demand

– Market structure


CASE STUDY: The Paper Market

• Paper market used for hedging and speculation

• Derivatives derive their value from something

– PRA price assessments

– Trading in the derivative during specific time window

• Traded to manage exposure to price risk

• Conducted bilaterally or cleared via exchange

• Brent, WTI and Dubai the main crude paper markets

• North Sea traded using forwards, futures and swaps


Forwards, Swaps and Futures

• North Sea: Cash BFOE

• Buy/sell today for delivery in future

• Agree a price for a cargo loading

in a future month, but without

knowing which grade or what

specific dates until one month

before loading

• Trading finishes just before the

cargoes receive their loading

dates and become “Dated” Brent

• North Sea: Brent CFD

• Lock in spread between two things

• Guarantee a price for the

difference between Dated Brent

and the forward market in a given

week, but at a cost

• Trade contracts including the price

for this week, all the way up to

eight weeks from today

• North Sea: ICE Brent Futures

• Take a position on eventual value

of a forward contract for a future

month

• Trade an “outright price” on the

exchange, and the eventual

“settlement” price is higher, then

sellers lose money and buyers

make money

• Trade contracts for two months’

time or beyond

FORWARDS SWAPS FUTURES


The End-Users

• Price paid determined by value extractable in refinery

• North Sea crude processed by refineries worldwide

• Main demand centre in Rotterdam and Northwest Europe

• Other demand centres include South Korea and China

Source: Platts Analytics

-5.00

0.00

5.00

10.00

15.00

20.00

Mediterranean Cracking Refinery Margin Based on Urals (CIF)

Mediterranean Hydroskimming Refinery Margin Based on Urals (CIF)

NWE Cracking Refinery Margin Based on Brent (Dated)

NWE Hydroskimming Refinery Margin Based on Brent (Dated)


How is Dated Brent assessed?


The Platts Dated Brent assessment

Dated Brent

Cash BFOE

Cargo Diff

Brent CFDs

Cash BFOE (forwards)

Establishes outright price value of crude oil loading in a specified month. Forms the main component of the forward curve calculation

Brent CFDs (swaps)

Establishes daily market structure for full period of forward Dated Brent market. Forms the other part of the forward curve calculation

Cargo Differential (physical)

Cargoes price as a differential to Dated Brent. Today’s value for forward Dated Brent is shown by the forward curve. The cargo differential is added to the appropriate point on the forward curve to give a final physical cargo value. The average of all daily values for the most competitive BFOE grade is the final Dated Brent price


The Dated Brent Spreadsheet

Forwards

Futures

Swaps

Forward Curve

Physical

21


CASE STUDY: Platts Methodology

• Based on transparent bids, offers and trades

– Above outstanding bids

– Below outstanding offers

• Timestamped to a single moment in time

• Methodology standardised in formal guidebook

• Bids and offers follow strict rules

– All price indications must be received in time

– Price changes must be incremental

– All bids and offers must be transactable

• Methodology may evolve where required


Physical BFOE Cargo Assessment

• Physical bids, offers and trades at 16:30

• Entered onto appropriate window dates

• Assessment made using MOC information

• Previous day’s assessment used as a guide

• Structure is often proved by bids and offers

-0.8000-0.7000-0.6000-0.5000-0.4000-0.3000-0.2000-0.10000.0000

FOB Brent

Bid

Offer


The Past, the Present, and the Future

• Today’s Dated Brent assessment

will be used to price out North Sea

cargoes which traded up to a

month ago

• Until today, their price will have

been floating. From today, their

price will become a known quantity

• This enables companies to hedge

their risk and specialise in specific

regional market expertise

• Today’s Dated Brent assessment

is calculated using cargoes

loading between 10 days and one

month from now

• These cargoes trade as a

differential to Dated Brent. The

differential is fixed at the time of

trade but the Dated Brent

component is floating until the

cargo comes to load

• When they load, they will price on

that day’s Dated Brent value

PAST FUTURE


Current Market Trends


Dated Brent back to $60+/b; backwardated market structure returns

Source: S&P Global Platts

-$2.00

-$1.50

-$1.00

-$0.50

$0.00

$0.50

$1.00

$1.50

$2.00

$20

$30

$40

$50

$60

$70

$80

$90

$100

Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19

Dated Brent (left axis) Dated Brent Swap Q1 vs Q2 (right axis)

Contango Contango

Backwardation

Backwardation


Breakevens around the world falling as companies learn to compete with U.S. shale

Source: S&P Global Platts Analytics


CASE STUDY: OPEC

• Organisation of 14 oil exporting countries

• Co-ordinates and unifies oil policy of members

• Stated aim is to ensure stable oil markets

• Accounts for about a third of world’s crude output

• Production decisions have significant supply impact

• Supply changes can affect price of Dated Brent

• Price changes lead to complex market response

– Can incentivise production elsewhere

– Can lead to narrower sweet/sour spreads

– Market takes forecasts of OPEC activity into account

• One major actor among many for crude market


Global sour crude oil shortage pushes Dubai to parity with Brent

Source: S&P Global Platts

-$12

-$10

-$8

-$6

-$4

-$2

$0

$2

Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19

Platts WTI-Brent Platts Dubai-Brent


OPEC, Trump and oil prices


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Resid

VGO

Mid Dist

350F minus

Changes in crude slate and the impact on refining

| ---------------------------- HEAVY ---------------------- | ----- MEDIUM ------- | ------------------ LIGHT --------------------- |--- COND ---| DEMAND

API ~9 17 22 21 28 33 32 40 33 43 39 55

% S ~5 2.5 3.4 3.7 2.9 1.8 0.2 0.4 0.2 0.2 0.8 0.02

650F+ %S ~5 3.3 4.2 4.7 4.9 3.3 0.3 0.5+ 0.3 0.5 1.7 0.1

Assa

y y

ield



Global crack spread trends to reverse in late 2019

-30

-20

-10

0

10

20

30

Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20

NYH RBOB vs Brent ARA Diesel vs Brent Sing Naphtha vs Dubai Sing HFO vs Dubai

Diesel strength eases, then strengthens

Gasoline recovers seasonally but down YOY

HFO firm for now but will

ease

Naphtha gets some uplift

from gasoline

$/B

bl



Conclusions


QUESTIONSANDANSWERS

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