Oil buyers can force change in the region

02 December 2009

More Gulf states are expected to follow Saudi Arabia’s switch to the Argus sour crude benchmark

Saudi Arabia’s switch away from the long-used West Texas Intermediate (WTI) oil-pricing benchmark in October quickly sparked speculation that other Middle East producers would follow its lead.

Kuwaitwill decide whether to dump WTI before the end of this year. Other countries in the Gulf may also drop the yardstick for pricing US-bound oil, demonstrating the weight that national oil company Saudi Aramco still holds in global crude markets.

With the world’s largest oil company changing direction, it is easier for smaller producers to change their benchmark too. Buyers of crude have been shocked by volatility in the WTI index caused by the uneven build-up of crude inventories at the pipeline hub of Cushing, Oklahoma, where WTI is priced.

For sellers such as Saudi Arabia and Kuwait, which export high-sulphur crude, the WTI benchmark, which is a blend of sweet crude, bears little resemblance to the oil they ship to US shores. More Gulf states are now expected to follow Saudi Arabia’s lead in switching to the Argus sour crude index, which is made up of blends that more closely resemble the heavy crude oil they sell.

The industry is now buzzing on speculation that Riyadh’s, and potentially Kuwait’s, move away from WTI could lead to a wider shake-up in the world’s oil benchmarks. Asian buyers, in particular, are hopeful that Aramco may lead efforts to create a new pricing benchmark for exports to the Far East that reflects the huge flows of oil travelling from the Middle East to China and Japan.

A move to create a new index has merit. The problem for Asian customers is that Aramco is unlikely to rush into a decision unless its customers are complaining. They will need to voice their concerns to Gulf producers loudly if they want to provoke them into launching a new benchmark.

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