Saudi Arabia Shakes Up Oil Markets By Dropping WTI Pricing
Saudi crude oil prices will no longer be tied to NYMEX's WTI contract as of January 1, 2010. (image: willis-trading.com)
The Financial Times reported Wednesday on Saudi Arabia’s decision to drop the West Texas Intermediate (WTI) oil contract as the benchmark for pricing its oil.
The Saudis made the move due to increasing discontent with the WTI “after the price of the benchmark became separated from the global oil market this year.” The decision is a huge blow to the New York Mercantile Exchange, as WTI is their most-traded contract.
Forbes also reported on the news, noting that Saudi Arabia felt it was losing far too much money on the volatility of the WTI contract. With speculation driving prices both up and down, it was becoming hard to ascertain the “real” price of crude. Come January, Saudi Arabia will align itself with the London-based oil pricing company Argus, basing the price of oil for U.S. customers on their newly created index.
The question remains if Saudi Arabia’s action will encourage other oil producers to abandon WTI. Edward Morse, chief economist at LCM Commodities in New York, said “It is a recognition by large players that WTI sometimes does not reflect the true value of crude oil in the waterborne market.” This discrepancy increases volatility, which can in turn lead to higher, possibly inflated, prices.
Phil Flynn of the International Business Times commented Thursday that, in his opinion, the world should not yet give up on WTI. Despite recent volatility in the markets, the contract has largely been a stable one. He points to a storage problem in Cushing, OK, where the IEA recommended building larger storage facilities and more pipelines “to assure that a localized refinery problem won’t distort the price of oil.” If those problems could be sorted out, Flynn said, WTI should retain its benchmark status.
For heating oil and other energy consumers, it’s possible this upheaval could shake out to be positive. Saudi Arabia is one of the world’s biggest oil producers. With them not using the WTI contact, there could be decreased interest overall on NYMEX. This would lead to less trading activity, less speculation, and therefore less volatility. While it’s not a guarantee of low prices to come, it could lead to a more stable market, which is helpful when predicting what the markets are actually going to do.
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