By Ahmed Subaey, Vice President, Marketing, Sales & Supply Planning, Saudi Aramco
In early July Saudi Aramco announced that from October 2018 it would be changing the pricing formula for crude oil sales to Asia. This is the first ever change to the company’s Asian formula. The use of Platts’ Oman assessment in the current formula will be replaced with the marker price of the Oman Crude Futures Contract traded on the Dubai Mercantile Exchange (DME), commonly known as ‘DME Oman’.
Over the years, Saudi Aramco has made several modifications to its price formulas for other regions. In North America, after the introduction of Alaskan North Slope (ANS) crude as price marker in 1986, Saudi Aramco changed the price formula for the Americas twice. First, WTI was introduced in 1994 when ANS flows to the US Gulf (USG) proved insufficient for good price discovery. Then, in 2010, WTI was replaced by the Argus Sour Crude Index (ASCI). Similarly, in Europe, Dated Brent was replaced by the Brent Weighted Average index (BWAVE) in 2000; and more recently in July 2017, the ICE Brent settlement price replaced the BWAVE.
All these changes were made with the intent of providing a more reliable, relevant, transparent and liquid crude marker that best serves the interests of Saudi Aramco and our customers. In some cases, as with the decision to replace WTI, the marker was very liquid and transparent, but its land-locked nature created a disconnect from the USG waterborne market, thus losing relevance as a price marker in that region. In the case of ICE Brent in Europe, the driver was to provide our customers with a marker that is easier to hedge, to eliminate their basis risk. In all cases, the changes were thoroughly evaluated beforehand, and widely accepted.
The current move to replace the Platts’ Oman assessment with the Oman futures contract price has several drivers.
First, liquidity in the market for ‘partials’ Oman that Platts uses to set its Oman price has been largely nonexistent for more than two years. By contrast, the liquidity of the DME contract has reached a level that provides robustness and sustainability, indicating that price discovery for Oman crude oil has moved from the physical market to the futures contract. Although trading volumes remain a fraction of those for the Nymex WTI and ICE Brent contracts, DME trades have significantly picked up over the years and recently reached an average of 6mn b/d. This level of liquidity, as well as the number of participants in the exchange, makes the contract the most important Oman price-discovery tool in the Asia-Pacific region.
Additionally, the inclusion of DME Oman in Saudi Aramco’s marker improves our customers’ ability to hedge their crude oil purchases. Historically, the only hedging option for crude oil purchases in Asia was the market in Brent-Dubai swaps. This allowed customers to hedge the Dubai leg of the price, but at the price of having to accept some basis risk on the Oman leg. Now customers will be able to use the DME Oman contract to directly hedge their Oman exposure with no basis risk. To date, the role of DME Oman as a pricing marker for sales and purchases of other crude oil grades has been modest, as has the contract’s use as a risk management tool. However, the potential for its use for hedging purposes to grow after the adoption by Saudi Aramco and the possible move by other suppliers in the region is very high.
The adjustment of the pricing marker for crude oil sales to Asia is just another example of how Saudi Aramco strives to provide its customers with the best possible service. A trusted, transparent, market-related and universally accepted price is only part of this service. Among the other elements offered to our customers are stable and consistent crude quality, flexibility and optionality in scheduling, reliable and efficient port operations, and the capacity to react to sudden market changes or unexpected operational disruptions. Having significant spare production capacity also helps to provide stability and confidence both to our customers and to the oil market in general.
As recent events have proven, oil markets remain inherently uncertain and volatile. It is impossible to isolate them from geopolitical events and disruptions that affect market players’ views and positions. Due to the complexity of oil distribution and refining operations, unexpected issues can cause temporary interruption of supplies, adding to the uncertainty. Saudi Aramco’s customers can rest assured that the company is committed to be the world’s most reliable supplier, as well as continuing to provide an integral response to their needs, combining consistent, market-related prices; reliable and flexible operations; and a devoted workforce ready to respond to our customers’ requirements.