Vitol Says Brent Oil Benchmark Needs African Fix on Output

Feb 18, 2014 7:44 am ET

(Updates ninth paragraph with new attribution.)

Feb. 18 (Bloomberg) -- Brent is losing its effectiveness as the global benchmark crude price and needs to be fixed, according to the head of Vitol, the world’s biggest oil trader.

Dated Brent, a measure of North Sea crude that’s used to price more than half the world’s oil from Colombia to Australia and underpins billions of dollars in derivative commodity contracts, is becoming less viable because output is dwindling, and much of what remains is shipped to Asia, Chief Executive Officer Ian Taylor said yesterday in London. Crude from Africa, the Caspian Sea and possibly Russia should be added to the basket of oil used to determine the price, he said.

“We are extremely concerned about Brent already not becoming a very efficient or effective benchmark,” Taylor said at International Petroleum Week, a conference in London organized by the Energy Institute. “It’s quite a concern when you see that production profile. Maybe the time has come to really broaden out Dated Brent.”

Brent’s credibility came under scrutiny in May as European antitrust officials raided the offices of BP Plc, Royal Dutch Shell Plc, Statoil ASA and Platts, the unit of McGraw Hill Financial Inc. that assesses the benchmark, as part of a probe into alleged fixing of oil prices. Ensuring the accuracy of commodity prices has gained urgency as the global market surges. Trade in fuels and mining products swelled to $4.1 trillion in 2012, according to the World Trade Organization.

Dated Brent is failing to represent the market in Europe because about 60-70 percent of North Sea grades that make up the marker was sold to Asia in recent months, Taylor said. The benchmark currently comprises Brent, Forties, Oseberg and Ekofisk crudes.

Oil Shipments

Scheduled monthly shipments of the four grades averaged about 859,000 barrels a day last year, compared with 1.47 million barrels in 2007, according to loading programs obtained by Bloomberg. Planned exports fell to as low as about 700,000 barrels a day in October 2012.

Platts, which publishes prices for raw materials ranging from coal to plastic, began assessing Dated Brent in the 1980s. As North Sea crude production declined, the company altered its assessment process to keep the benchmark reflective of the market. It added Forties and Oseberg to the basket of crudes in 2002 and Ekofisk in 2007. Platts has also introduced measures to account for the fluctuating quality of the oil and expanded the period of assessment.

Physical commodity prices typically reflect the cost of taking delivery of raw materials, in contrast with futures and other derivatives that don’t necessarily stipulate the actual exchange of goods. Deals are mostly private, while financial contracts are bought and sold on regulated exchanges with prices visible to all.

Beyond Europe

Platts might have to look outside the North Sea to bolster its assessment if supply doesn’t pick up, Jorge Montepeque, Platts’s global director of market reporting, said at an event hosted by his company yesterday.

Bloomberg LP, the parent of Bloomberg News, competes with Platts and other companies in providing energy-markets news and information.

Nigeria’s Bonny Light, Qua Iboe and Forcados crudes, Algeria’s Saharan Blend and CPC Blend from the Caspian Sea could be added, as well as North Sea grades DUC and Troll, to improve Dated Brent, according to Vitol’s Taylor. Russian Urals, a higher-sulfur crude than the North Sea grades, eventually could be included in the pool of crudes, he said.

Scheduled monthly shipments of Qua Iboe averaged about 343,000 barrels a day last year, while CPC exports were about 680,000 barrels a day. Shipments of Urals from the Baltic port of Primorsk were 1.1 million barrels a day.

Financial Probes

Dated Brent was at $108.63 a barrel, JBC Energy GmbH, a Vienna-based energy consultant, said in a report yesterday. Brent crude futures on the ICE Futures Europe exchange settled at $109.18, down 1.5 percent this year.

Authorities around the world are investigating alleged abuse of financial benchmarks by the companies that help set them. Three former Barclays Plc employees were charged by U.K. prosecutors with conspiring to manipulate the London interbank offered rate known as Libor, bringing the number of people accused in global probes to more than a dozen. Other rates under investigation include the ISDAfix, used to determine the value of interest-rate derivatives.

Oil prices may advance this year because of supply disruptions in nations including Libya and Nigeria and stronger- than-anticipated demand in developed economies, according to Taylor. Geneva-based Vitol had revenues of $303 billion in 2012, according to the company’s annual report. Figures for last year have yet to be released.

--With assistance from Laura Hurst in London. Editors: Mike Anderson, Alexander Kwiatkowski