Has This Change Put Brent’s Benchmark Future on Shaky Ground?

Since 1990, Royal Dutch Shell (NYSE:RDSA)(NYSE:RDSB) has been the custodian of the terms that govern the North Sea Brent crude market, and the oil and gas company used its status to rewrite the rules for the benchmark that prices billions of dollars of oil worldwide, sparking a debate over whether the benchmark was in need of a reform.

In an amendment of its SUKO 90 contract terms and conditions, Shell announced Friday that it will begin requiring buyers to pay a premium for North Sea oil grades sold in the Brent Blend forward market. The price of 25-day forward contracts for Brent, Ekofisk, and Oseberg oil will be set at a “quality premium,” based on their price difference relative to the cheaper Forties Blend grade.

The Quality Premium will be applied to BFOE forward contracts — including Brent, Forties Oseberg, and Ekofisk crudes —  beginning on Monday, and will apply to all cargoes loading in May.

“The new robust and transparent Quality Premium mechanism will support the Brent benchmark by allowing for more crude grades and cargoes to be used in establishing the underlying market price,” Shell spokesman Jonathan French told Bloomberg in an emailed statement. “It will therefore contribute toward higher liquidity and better price discovery.”
BP (NYSE:BP), a large trader in the North Sea Brent oil market, agreed on Monday to lend “its weight to the change of trading terms,” a change that will make their adoption more likely, reported Reuters. “BP has agreed with Shell to trade on the amended Brent contract terms proposed by Shell as we believe these changes will improve the effectiveness of the Brent contract as an international price benchmark,” a company spokesman told the publication.

But other oil companies have been less supportive. “If it’s imposed we won’t trade on these terms,” said a source with another oil company that trades North Sea crude, who declined to be identified. “It can be improved a lot,” the source told Reuters.

The decline in North Sea oil output coupled with unplanned oilfield outages have brought into question whether Brent’s position as the global benchmark is warranted, as these small local losses can increase prices worldwide.

Brent oil futures, which are increasingly seen as the global oil price, dropped on Monday to just below $118 per barrel.

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