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Oil Price MethodologiesCrude Price Formation
Nairobi
Kenya
May 24, 2007
NOT AN OFFICIAL UNCTAD RECORD
Today’s Agenda
• Fundamental oil market behavior• Futures market behavior• Benchmark price formation• Interrelation between financial and physical
markets• Recent price performance and the impact of
speculative flows• Comparison of Nigerian crudes with other
benchmarks• Recent proposals regarding dated Brent
price formation
Market drivers 2001-2007
• Rampant oil demand growth, particularly in Asia
• Background of strong global economic growth
• Limited spare production capacity outside Middle East
• A constrained refining environment • Speculative investments in energy markets
But…There is nothing like high prices
to cure high prices
Crude oil futures trading volume
0
200000
400000
600000
800000
1000000
1200000
1400000
1600000
Crude oil open interest
750000
1000000
1250000
1500000
1750000
2000000
2250000
2500000
2750000
3000000
Index Returns
S&P GSCI ReturnsMay 24, 2007
Daily -1.65% Month to Date -0.84% Year to Date 4.04%
Criteria for benchmarks
• Ample production volume• Open trade free of
bottlenecks• Fungible quality• Wide equity and customer
base• Market liquidity• Price Transparency
Market forces determine
price
Price cannot be dictated by
any single party
But market price is definitional
• Price is a function of key determinants including:– Size of parcel traded– Time of delivery of parcel traded– Quality of parcel delivery– Method of delivery of parcel– Payment and finance details for parcel
delivered– Time of price determination– Volume tolerances surrounding parcel
delivered– Optionalities attached to parcel delivered
Benchmark specifications
• Publishers have extensive documentation explaining definition of price
• Example with Dated Brent:– Price established at 1630 London time– Parcel size is 600,000 bbls– Method of delivery is FOB for cargo
delivery– Delivery to occur in a three day period
between 10-21 days from day of publication
– Payment is 30 days after bill of lading
Responsibilities– Publishers must be accurate, precise and
have robust methodology systems– Publishers’ definitions must line up with
market practices and best standards including legal and corporate practices
– Exchanges have similar responsibilities and need to ensure their processes and settlements meet the high standards expected of a benchmark
– Producers must be responsible and transparent
– Market makers must meet transparency disclosure requirements
Expectations
Producers, consumers, futures markets, traders, regulators and all those pricing in or out expect full
convergence between market values and published values
All expect full transparency and responsible behaviour
Benchmarks are expected to reflect market value
Most critical benchmark requirement
Published/settlement price should converge with the market price
=
Any market participant should be able to buy or sell at published price
Use Of Benchmarks In Pricing
Futures
OTCDerivatives
Term Contracts
Spot
• • Platts benchmarks are used to price term contracts• Futures settlements are often tied to spot market• Derivatives “price out” against Platts spot price assessments or futures settlements
Brent/WTI
Pricing Structure
Wet
Forward
Dated Related
Derivatives
Futures
Price highlights
Brent WTI Mars Dubai Oman Urals Med
Start of year 61.67 61.05 56.45 55.18 56.03 57.58
High 78.69 78.40 71.03 72.29 73.46 73.04
Low 55.89 56.15 49.15 48.88 55.30 46.78
End of year 58.92 61.05 53.80 55.63 57.02 55.54
Average 2006
65.15 66.41 58.07 60.70 61.69 60.41
Average 2005
54.53 56.77 43.66 49.75 50.66 50.87
Average 2004
38.27 41.41 35.31 33.70 34.39 34.50
Dated Brent – Connecting the globe
Dated Brent
Canadian CrudeLatin American
Crude
North Sea Crude
FuturesDerivatives
African CrudeMiddle East
Crude
Russian andCentral Asian
Crude
Dated Brent linkedImports into almost
all countries
Global oil pricing off Dated BFO
Price behaviorNigerian crude, Brent, WTI
30.00
35.00
40.00
45.00
50.00
55.00
60.00
65.00
70.00
75.00
80.00
$/b
arr
el
WTI Brent BQ
Nigerian BenchmarksKey Nigerian crude grades
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
3.00
$ D
iffe
ren
tial
to D
td B
ren
t
Escravos
Bonny Light
Brass River
Brent, Forties, Oseberg output Aug 2004-present
20
22
24
26
28
30
32
34
36
38
40
Mill
ion
sB
bls
BFO Daily Production Rates Aug 2004 - present
67 Cargoes
48 Cargoes
0
10
20
30
40
50
60
Aug-0
4
Oct-04
Dec-0
4
Feb-0
5
Apr-0
5
Jun-
05
Aug-0
5
Oct-05
Dec-0
5
Feb-0
6
Apr-0
6
Jun-
06
Aug-0
6
Oct-06
Dec-0
6
Feb-0
7
Mil
lio
n b
arr
els
Brent Forties Oseberg
48 Cargoes
63 Cargoes
0
10
20
30
40
50
60
Jan-
05
Mar
-05
May
-05
Jul-0
5
Sep-0
5
Nov-0
5
Jan-
06
Mar
-06
May
-06
Jul-0
6
Sep-0
6
Nov-0
6
Jan-
07
Mar
-07
Mill
ion
bar
rels
Brent Forties Oseberg Ekofisk
BFO Aug 2004 – present (plus Ekofisk)
71 Cargoes92 Cargoes
Production comparisons 2006
Ekofisk Brent
Forties
Oseberg
Brent Forties Oseberg Ekofisk
197.1m - 35.98%
86.6m - 15.82%
83.1m - 15.18%
180.85m - 33.02%
39, 7%
80, 14%
43, 7%
78, 13%
122, 21%
62, 11%
40, 7%
36, 6%
80, 14%
CNR Shell ExxonMobil Total BP Statoil Norsk Hydro ENI Others
Number of cargoes of BFO by company 2006
580 Cargoes
?