(The opinions expressed here are those of the author, a columnist for Reuters.)
By Clyde Russell
LAUNCESTON, Australia, Oct 1 (Reuters) - Talk about inconvenient timing. Just as Saudi Arabia is about to switch the way it prices its oil exports, the new benchmark throws a spanner in the works by surging inexplicably.
Oman crude futures traded on the Dubai Mercantile Exchange (DME) rushed to their highest level in four years last week, trading as high as $90.90 a barrel on Sept. 26.
While the sharp rise in prices isn’t without precedent, especially given market concern over the imminent loss of much of Iran’s exports, what was unusual was that Oman swept past Brent futures, the global benchmark.
This has happened only on a handful of occasions in the past decade, most recently in September last year, and then only for a day and at a relatively modest premium of 54 cents a barrel, according to calculations by S&P Global Platts.
Oman and Brent futures have different daily settlement times, but when the DME contract finished on Sept. 26 it was at $88.96 a barrel, while at that time Brent was at $82.14.
Oman normally trades below Brent as it is a medium-sour crude, which is typically more costly for refiners to process and doesn’t yield as much of the high-value products such as gasoline as does Brent, which is a light, sweet oil.
For Oman to romp to such a large premium to Brent, and maintain it for four sessions, is unusual and will no doubt be of concern to both the DME and Saudi Arabia, as well as the refiners who buy Saudi crude.
Traders appear largely to have been caught by surprise by last week’s spike in Oman, if comments at the annual industry gathering in Singapore were anything to go by.
But the likelihood is that the increase in Oman will be unwound in coming days, given that it seems to have been largely driven by buying by Chinese refiners.
The bulk of delivered Oman heads to China and it appears that refiners in the world’s largest crude importer, especially smaller independent operators, were keen to stock up before the end of the year to use up their import allocations.
Chinese buying may also have been boosted by the fact that this week is a holiday for the country’s National Day, meaning most crude trading businesses will be closed.
There is also likely a smaller element of buying boosting the Oman contract, and that is the potential looming shortage of heavier and sour grades of crude as renewed U.S. sanctions against Iran ramp up to include all of the Islamic Republic’s crude exports from November.
Many Asian refiners prefer heavier crudes, having invested in units that can process these grades into higher value products, especially middle distillates such as diesel and jet fuel.
While it’s likely that Oman’s premium to Brent will be unwound in coming days, the timing couldn’t have been worse for Saudi Aramco, the state-owned producer that is the world’s largest exporter of crude.
From October, Aramco was changing the benchmarks used in calculating its official selling prices (OSPs), for the first time since the mid-1980s.
The Saudis used to use the average of Oman and Dubai prices, as assessed by S&P Global Platts in calculating the OSPs.
From this month it will use the average monthly price of DME Oman futures as well as the Platts average for physical Dubai quotes.
The change has been a long time coming and is perhaps a reflection of the success the DME has had in building Oman futures into a viable benchmark for Middle East medium heavy and sour crude.
The Platts assessments are also long-standing and well-respected in the market, but were perhaps more vulnerable to price spikes given the relatively small amount of physical crude underpinning the pricing.
This happened in 2015 when the trading arms of China’s state-controlled refiners bought up large amounts of the oil available through the Platts pricing mechanism in a matter of days, leaving the pricing subject to volatility and spikes.
The switch to using DME futures as one-half of the Saudi benchmark was supposed to make the pricing more transparent and robust, given the Oman contract has more physical volumes behind it and the backing of a cleared exchange.
But last week’s surge has shown that the Oman contract can also shift dramatically in a short space of time, if the demand for crude is there.
The Saudi OSPs tend to set the pattern for crude pricing from Iran, Iraq and Kuwait, meaning some 12 million barrels per day of exports are impacted.
Asian refiners will now be worried that last week’s price action will result in higher than anticipated OSPs, with the Saudis likely to announce their prices at the end of this week.
This isn’t the start the DME and Aramco would have wanted for the new pricing system, but the chances are it is merely a blip, rather than the harbinger of sustained volatility and uncertainty.
Editing by Joseph Radford