LONDON May 11 Trading in the North Sea crude
oil physical market has seen a boost from a growing number of
participants, but trader Mercuria warned on Thursday that more
financial players meant derivatives could have an unduly large
impact on the setting of the dated Brent benchmark price.
Dated Brent, which governs around two-thirds of the world's
oil trades, is set using prices of physical barrels of four
streams of North Sea crude, Brent itself, Forties, Ekofisk and
Oseberg (BFOE) and a series of derivative rates.
Kurt Chapman, head of crude trading at Mercuria, a major
player in both the physical and "paper" North Sea markets, said
he welcomed the additional liquidity and vibrancy that a broader
spectrum of market participants brought to the market, but said
increased "financialisation" was not without consequence.
"The liquidity is appreciated, but we need to make sure we
retain the robustness of the process," he said.
The pool of market players in the North Sea ranges from oil
producers such as BP, Shell or Total,
to traders such as Mercuria itself or Trafigura, as well as a
range of more pure financial traders.
Market participants bid and offer cargoes of 600,000 barrels
each traded on a platform run by pricing agency S&P Global
Platts, known as "the window", and the lowest-priced crude will
then set the daily price of dated Brent.
Mercuria is one of the world's largest traders of physical
commodities. The company, which is based in Switzerland, traded
2.1 million barrels of oil equivalent per day in 2016.
This compares with 7 million bpd of crude and products
traded by rival Vitol last year.
To manage price risk, traders use swaps such as contracts
for difference (CFDs) to hedge cargoes, but not all participants
in the North Sea derivatives market buy and sell physical
"Right now if you look at the Brent benchmark, in the
window, there are physical bid and offers on the screen, fine,
it's still a physical BFOE product," he said, adding that some
derivatives eventually resulted in physical delivery," Chapman
said during a panel discussion at the annual S&P Global Platts
"The link between the two, the dated (price) and the BFOE
(paper market) is actually a financial product, which are CFDs
that are traded on the screen, more actively almost, by
financial funds, 'curve shapers', or 'strippers', as we call
them, who are trying to arbitrage opportunities between other
financial products and they are setting a very significant
portion of what ultimately becomes the dated Brent quotation."
The North Sea market, which is essentially backed by just 1
million barrels per day of supply, can be volatile and at times,
just a handful of players will control a proportionally large
number of barrels that they may need to service their own
refineries or provide to customers, which in turn can create a
temporary liquidity vacuum.
Financial players in the CFD market can accumulate large
speculative positions that are never intended to result in
physical delivery, but can have a knock-on effect on the price
of a barrel of oil.
(Reporting by Amanda Cooper; Editing by David Evans)