The conflict in Iran has created major disruptions for a critical oil pricing system that affects nearly one-fifth of the world’s crude supply, according to industry reports from Singapore and London.
The Dubai oil benchmark, which determines pricing for 18 million barrels of daily oil production, relies on crude from the United Arab Emirates, Oman and Qatar – most of which typically ships through the Strait of Hormuz.
Since the Iran war started with U.S.-Israeli military action on February 28, oil shipments have largely stopped due to concerns about Iranian attacks on vessels passing through the strategic waterway.
S&P Global Energy Platts, the organization responsible for setting Brent and Dubai oil prices, now confronts the challenge of pricing oil that cannot be transported from Gulf ports.
Industry sources told Reuters the benchmark system has essentially collapsed, with many traders abandoning Dubai-priced cargo deals and related derivatives trading. Many are demanding significant changes to the system.
PRICING DIFFICULTIES DURING SUPPLY CRISIS
The situation highlights how challenging it becomes to price oil scheduled for delivery two months ahead during what experts call the most severe supply disruption in history.
Uncertainty remains about when buyers might resume loading crude from Strait of Hormuz ports, as very few tankers have traveled through the waterway since fighting began.
Consequently, Middle Eastern crude prices have reached nearly $170 per barrel, surpassing Brent’s previous record of $147 set in 2008, dramatically increasing costs for Asian purchasers who rely on Dubai pricing.
Market participants are now turning to alternative pricing approaches, including different benchmarks. Multiple Asian refineries have shifted to pricing U.S. crude purchases based on differentials to international Brent crude futures.
AVAILABLE CRUDE GRADES REDUCED SIGNIFICANTLY
Shortly after hostilities commenced on March 2, Platts removed oil loading within the Strait from consideration, reducing the benchmark from five crude grades to just two – Abu Dhabi Murban shipped from the UAE’s Fujairah port, and Oman crude. According to Platts, this decision eliminated approximately 40% of deliverable crude.
Platts, which must continue publishing Dubai prices used to value numerous crude barrels, stated it has conducted extensive discussions with market participants during this unprecedented period.
“Widespread market feedback stressed the need for immediate action to ensure the Platts Dubai benchmark continued to reflect the tradable spot market value of physical crude oil in the Middle East and we are confident in its ability to do so, even through historic moments of volatility,” the agency responded via email to Reuters.
Industry representatives have suggested various modifications to Platts, from suspending Dubai price assessments to restoring the three crude grades for delivery or adding other regional grades based on delivered Asian prices, according to knowledgeable sources.
“The liquidity of the Dubai benchmark is being threatened and market participants would surely be looking for an update to the methodology,” stated Sparta Commodities analyst June Goh.
ASIAN REFINERIES FACE MAJOR IMPACT
Elevated Dubai prices have severely affected Asian refineries, increasing their primary feedstock costs and consequently raising retail fuel prices for consumers, Goh noted.
Platts’ March 2 modification surprised many market participants, some reported.
Platts usually conducts lengthy consultations before implementing changes, and traders were caught off-guard by the rapid exclusion of May-loading shipments during March trading, noting the benchmark no longer represents the region accurately.
“It is costing consumers in March tens of billions of dollars, because the Platts numbers published in March are used to price many Asian and remaining Gulf barrels,” explained Onyx Capital’s Jorge Montepeque, who previously designed the benchmark while working at Platts, referring to the benchmark’s dramatic increase.
UNPRECEDENTED TRADING ACTIVITY QUESTIONED
Platts determines Dubai prices through trades conducted during its Market on Close (MOC) process, known as “the window,” using partial cargoes of 25,000 barrels each. When parties complete trades for 20 partials, sellers declare delivery of a 500,000-barrel cargo from Dubai basket crude grades.
Trading records reveal TotalEnergies’ trading division Totsa invested approximately $4 billion in Dubai partials during March, resulting in delivery of 77 Oman and Murban crude cargoes totaling 38.5 million barrels from the 82 cargoes delivered through MOC.
TotalEnergies, which refused to provide comment, controlled purchases throughout March, while Mercuria and Equinor acquired five cargoes on the final trading day, data indicated. Totsa’s market dominance contributed additional upward pressure on Dubai benchmark pricing.
“This is huge,” commented Adi Imsirovic, an experienced oil trader and benchmark expert, regarding Totsa’s trading activity.
“Given the overall market situation and the extent of the price increases as well as the volume of oil involved, this might have been the biggest oil market position ever,” he continued.
Large position accumulation by physical oil trading participants is standard practice and violates no regulations.
Some industry players negatively affected by price movements will face significant costs from the Dubai benchmark’s sharp rise, with traders estimating losses between $60 to $100 per barrel, depending on when they covered short positions.
