A move to include Iraqi crude in the benchmark price for nearly $500 billion of Middle East oil sold to Asia annually would make for a more robustly traded but also a potentially more volatile marker. Most of the crude exports from the world's top producers in the Middle East flow to Asia, and the value of the 12 million barrels per day shipped is based on the Dubai crude price published by pricing agency Platts.
As Iraq's crude output rises with multibillion dollar investments from the world's biggest oil companies, Platts is considering adding trade in Iraq's Basra crude to the oil streams it monitors to set the price. In theory, the higher the volume of crude trades that can contribute to a benchmark, the less susceptible the price is to manipulation through trading plays or volatility due to production problems.
But with Iraq still wracked by sectarian violence that regularly interrupts crude flows to export terminals, the inclusion of Basra could make the Dubai pricing benchmark more vulnerable to sharp changes in supply volumes. Basra also brings with it problems with quality and loading delays that would make it difficult for Platts to integrate the oil into its pricing methodology.
"Basra is a suitable crude from many points of view," independent consultant John Vautrain said. "There is volume which is very good and quality is in the right general range to be useful." "For Basra to work out, several things have to happen," he said. Dubai crude has served as a benchmark for the region but output has declined to about 50,000 bpd from more than 400,000 bpd.
Platts has already tweaked the benchmark twice, adding trade in crudes from neighbouring Oman in January 2002 and in Abu Dhabi's Upper Zakum in February 2006, where supply is holding steady at best. Platts, a unit of McGraw Hill, began talks with Iraq's State Oil Marketing Organisation (SOMO) earlier this year to include Basra crude in the benchmark. Iraq's output is expected to double by the end of the decade, according to the International Energy Agency, after passing 3 million bpd this year to become the Organisation of the Petroleum Exporting Countries' second-biggest producer after Saudi Arabia.
But ageing port facilities are struggling to handle the increase in volumes, resulting in loading delays. "Loading is a phenomenal problem," a trader with a Western oil company said. "There is great uncertainty as to when you can get the cargoes." Iraq has shortened the loading time for a Very Large Crude Carrier (VLCC) to about a week, down from two weeks, after a new terminal eased the load on the two older ones. But this is still longer than the typical 2 days, and the facility introduced a lighter crude stream from Ruwaila, causing quality issues.
"Ultimately it will increase liquidity, what we are not sure of is the impact on the quality," Alan Gelder, who heads downstream research at Wood Mackenzie, said. Iraq is working to have one stable quality for Basra Light crude, an Iraqi oil official said, but storage tanks needed to segregate the streams of crude won't be finished until some time in 2013.
SOMO and Platts will also need to offer Basra in 500,000 barrel cargoes, half or less than the 1-2 million barrels now. "I can't see SOMO, already with so many problems, being keen to allow smaller parcel loadings," a trader with a Western firm said. "Who's going to bear all the costs and risks to break up cargoes?"
A third issue with Basra Light is that SOMO sells the crude to the United States, Europe and Asia at three different official selling prices (OSPs), making it easy for traders to shift the crude from region to region to squeeze the market. The first step towards the inclusion is for Platts to start assessing a spot Basra Light price. Platts plans to hold that back until the storage and other facilities are ready. "We are very interested and focused on the Iraqi grade but further engagement is still needed," said Jorge Montepeque, Platts Global Director of Markets Reporting. "The industry is still working out details of commingling streams of Iraq's export quality crude.