Wednesday, 19 February 2014

Brent Market : Another British Interest to Defend

It's familiar enough to see oil quoted in terms of the price per barrel of Brent oil.  Perhaps less well-known, the price of Brent - a declining North Sea field - sets crude oil prices for around two-thirds of the world's oil and is the cornerstone of global financial oil trading, the forwards / futures / options markets, whether for hedging or speculation, arbitrage or market-making.  And so London rules the roost in global oil trading, which is a seriously big deal.  (A significant amount is OTC trade, so there are no definitive figures on how big.  But it's Very Big.)

That's despite a number of factors one could imagine working against it:
  • the amount of actual Brent production is not very great any more
  • the logistics of physically settling a Brent contract (i.e. actually taking delivery of a cargo of Brent) are pretty complex - the preserve of relatively few specialist energy companies and traders
  • the financial aspects of Brent trade are unusually complex, too (relative to other paper-traded commodities)
  • the long-time US price-setter - WTI (West Texas Intermediate) has a very aggressive lobby promoting it as the 'world's crude-oil price marker'
  • several other countries around the world with strong prima facie cases believe they should be the home of important price-setting markets - hence Dubai Blend and Urals Blend etc.
source: wiki
All to no avail for the would-be usurpers: and as in so many areas of trade and finance, London rules supreme.  Despite its decades of preeminence the WTI is now a tub of guts, suffering over the last few years from even worse logistical problems than Brent.  With its congested inland delivery point, and although still much traded in N.America for essentially historical reasons (e.g. lots of long term contracts are indexed to it), the WTI index has become a parochial anachronism, reflective of not very much at all.  Local traders favour new Gulf Coast indices that are much more representative of world prices, but they don't yet have serious volume / liquidity.  And the rest of the world - well, the RoW don't really have what it takes to establish a global financial market.  Yet.

But it doesn't mean they won't keep trying, and weaknesses in the Brent set-up need to be addressed.  It has evolved successfully in several steps over the years, expanding the underlying physical base from just the Brent complex to Brent+Forties complex, then + Oseberg and + Ecofisk, all still broadly similar North Sea grades.  However they are all in deep decline; and there has to be at least some material physical base underpinning the settlement of derivatives (maybe not in theory, but certainly in practice).

So the legion commercial interests with a stake in the Brent market had better stay ahead of the curve when criticisms are once more leveled at the technical underpinnings.  Based on past successes in this regard they probably will, but complacency could be fatal.

The other weakness which needs addressing isn't technical, it's criminal.  Yes, Brent has been subject of index-rigging allegations: probably less serious than LIBOR, but infinitely more troubling than the UK gas index allegations.  Yet again I find myself advocating public castration for any proven perps.  

Yes folks, Brent is another of those vital markets which make London what it is.  We need it to stay that way.



Weekend Yachtsman said...

Presumably the egregious Salmond thinks it all belongs to him.

Is this making any practical difference?

Or is he just ignored in this hard-headed real world business?

CityUnslicker said...

Salmond was the OIl and Gas economist for RBS back in the day -on this ground he should have his facts a little straighter than in other areas one would hope!

Demetrius said...

Um, now how about a Sussex Fracking Index?

Anonymous said...

Oh well done Mr Drew. Have you not learnt anything? If anything is a success in Briton keep it to yourself and FFS DON’T tell the Government.
Referencing oil, big money and London as a world premier, in the same post, will have all the lights flashing at GCHQ. I can just see Red ED spitting on the beeb tomorrow “It has come to our attention that some people here in the UK are guilty of the heinous crime of making Profit. What we need to protect hard working families from these fat cat oil barons, is the size 12, light touch of Government incompetence “, Roughly translated into We’ll tax it to death until we run the thing into the ground, while benefitting our European overlords (nice bung and a position on the council guaranteed after England’s been milked and turned into a duck pond). Of course we’ll get to keep a little of the responsibility. That will be the bi,t where the tax payer will have to fund the fines, after the SHTF about the price fixing.