Oil's Turbulent Year Stirs Debate on Relevance of Benchmarks - WSJ - 0 views
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A tumultuous year in oil markets left the energy industry reeling and gave fresh impetus to a perennial debate: What is the best gauge of crude prices?
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The Covid-19 pandemic confined billions of people to their homes and shut or slowed portions of the global economy in 2020, crimping demand for oil.
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The crisis reached its crescendo in April, when the price of light, sweet U.S. crude futures dived below $0 a barrel for the first time. Some traders were paying others to take oil off their hands.
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“What we saw was the single largest demand event in history,” said Peter Keavey, managing director for energy products at CME Group, owner of the New York Mercantile Exchange, where U.S. crude futures trade.
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Prices have since somewhat recovered. But those jarring moves of the spring added urgency to arguments about whether benchmarks used since the 1980s adequately reflect the modern oil market
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The crash rippled through the physical market, where, for example, Saudi Arabia sets prices for exports to the U.S. using an assessment tied to futures prices.
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The pricing system based on three benchmark crudes—West Texas Intermediate in the U.S., Brent in Europe and Dubai in the Middle East—has broadly stayed the same.
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WTI futures show no sign of being displaced as the primary gauge of U.S. crude prices, said CME’s Mr. Keavey. “Crude-oil infrastructure in the U.S. still revolves around Cushing,” he said. “The Gulf Coast is certainly an emerging price point, but it is still a secondary benchmark.”
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That means the price of the contracts typically converges with oil prices at Cushing in the run-up to their last day of trading.
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“We need to open up the benchmarks to be more reflective of global oil prices,” said Greg Newman, chief executive of U.K.-based Onyx Capital Group, which specializes in oil swaps. “How can it be accurate if you’re focusing on one tiny localized area?”
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Even before coronavirus, there was growing interest in assessing the price of crude at the Gulf Coast, home to other U.S. trading hubs.
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there has been a boom in U.S. oil exports since a four-decade embargo on its shipments ended in late 2015.
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Crude oil comes in dozens of varieties that differ by density and sulfur content. WTI, Brent and Dubai act as reference points against which other grades are priced. They also are the basis for financial contracts that allow players in the oil market to hedge against and speculate on price swings.