Recently, while writing short updates about the energy and commodities markets for ZE’s DataWatch magazine, I noticed a trend: many price reporting agencies (PRAs) have been updating their oil price assessment calculation methodologies to reflect the large number of deals done in the Asia-Pacific region. Wanting to find out more, I delved into researching price assessment calculation methodologies and global oil import trends. View the full results of my research in the December issue of DataWatch.

One of the most important revelations I gleaned from my research was that sales and purchases of varied commodities affect each country in the world, but few commodities have a global impact greater than that of oil. When attempting to research trends in the global oil industry, there is perhaps no better place to start looking than price assessments. It did not take much effort to find out that countries from the Asia-Pacific region, especially China, import and consume a significant volume of global oil resources. Countries like China are poised to play an increasingly prominent role in the oil sector, which will in turn have an impact on PRA product offerings.

Global Oil Industry Overview: Benchmarks and Assessments

When examining the global oil industry, it is important to understand two key terms: “benchmarks” and “assessments.” Benchmarks are prices for certain oils traded on the spot market that are taken to be representative of the real value of most oil in a particular region. Four major benchmarks in the global oil industry are:

  • Western Texas Intermediate (WTI), the North American benchmark, which is a blend of US domestic streams of light sweet crude oil which share a delivery point in Cushing, Oklahoma.
  • Dated Brent, the European benchmark, which is comprised of four crude streams from the North Sea: Brent Ninian blend, Forties blend, Oseberg, and Ekofisk (Platts).
  • Dubai-Oman, the Middle Eastern benchmark, which reflects the spot value of Middle East sour crude oil.
  • EPSO Blend, the Russian benchmark, which is composed of Russian crude streams from the East Siberia-Pacific Ocean pipeline.

The graph below shows NYMEX prompt-month calendar swaps from 2009 to 2013 for three major international benchmarks: Dated Brent, WTI, and Dubai-Oman. Prior to 2011, prompt-month swaps for these benchmarks were closely linked in price. Following 2011, these international benchmarks have varied from one another significantly. As the graph demonstrates, crude oil benchmark prices do not necessarily follow the same pattern; in 2011, a new set of influences and drivers caused price variations.

Oil Benchmarks Calendar Swaps (NYMEX)

Assessments, or average prices for different grades and types of oil that take into account a variety of market prices and factors, are published by many PRAs on a daily basis. Many price assessments are developed for the benchmark crudes listed above. Assessments are taken to be representative of the real value of physical commodities; they are used by global oil market participants to make trading, investment, and business decisions.

Global Oil Import Trends: The Rise of Asian Consumers

As oil assessments are meant to be reflective of real industry trends, it is worthwhile to examine a new industry trend that I believe will impact the assessment products offered by PRAs: increased Asian oil imports.

As shown in the figure below, in 2012 the United States imported the largest number of barrels of crude oil, with China and Japan closely following (EIA).

EIA's Top Global Oil Importers, 2012

Many countries in the Asia-Pacific region—especially China and Japan—lack the domestic crude oil supplies necessary to sustain their populations’ daily demands. As such, these countries consistently import large volumes of oil. In September 2013, China became the world’s largest importer of crude oil, eclipsing the United States (EIA STEO). In 2013, the Chinese government predicted that 60% of the crude oil they will use (an estimated 500 million tons) will be imported (Energy Industry).

Despite the high volumes of crude oil being transported to countries such as China and Japan, no Asian oil benchmark exists as of yet. Most oil consumed in the Asia-Pacific region is supplied by Middle Eastern downstream providers and is assessed according to the Dubai-Oman benchmark. As such, some market participants have argued that the Asian benchmark should officially be made Dubai-Oman, as this benchmark accurately reflects the price of the product consumed in many Asian countries. Other market participants feel that Brent crude should be used as the Asian benchmark, as Brent crude is a mature, very liquid international benchmark.

The expanding Asian oil market also necessitates new oil assessments that are more reflective of trades, bids, and offers made in this region. ZE’s DataWatch magazine makes frequent reference to a large number of modified or new oil assessments that attempt to take into account the price of crude oil imported and exported in this region. For example, from May 1, 2014, Platts will relocate many of its Asia crude assessments from RI (London-close crude assessments) to RP (Singapore-close crude assessments) in the Platts Market Assessment database to reflect “the fact that those assessments represent the value of crudes at the close of trading in Asia” (Platts Proposes Relocation of Certain Asia Crude Data). In other words, Platts recognizes the trend and reflects this trend in its set of offerings.

Conclusion

The world’s most highly populated countries are located in the Asia-Pacific region. Many of these countries are rapidly industrializing; the volumes of energy they require to support burgeoning infrastructure are enormous. Assessment providers will continue to develop new assessments and modify existing assessments if their assessment prices are to be accurate reflections of the real value of physical oil. Moreover, I suspect it is likely that an Asian benchmark will soon be established, given the high consumption of global oil resources in this region.

To read my full article, click here.