Oil.Expert’s interview with Jorge Montepeque, Platts global director of market reporting, is persuing a series of articles with speakers of International Conference «Exchange and OTC petroleum product market in Russia», which will be held in Moscow, in October 5-6.

Russian version

— Today oil market is characterized by high volatility. In these circumstances, Platts criticizes global reference quotation oil WTI. Please tell us briefly why and what alternative offers Platts?

— WTI has been having a lot of problems coping with its role as one of the world standards used in pricing crude. For instance, the U.S. market has a high level of imports and WTI is an important reference quotation characterized by its low sulfur content but sometimes WTI is quoted at a price lower than domestic or imported sour crude oil of inferior quality WTI has been showing erratic and unpredictable behavior and it appears isolated from world trends in oil prices. For example, in January WTI was trading at a record low difference below WTI even though both crude oils are comparable in quality. WTI traded at a low of $12.00/bbl below Brent. On a normal basis, WTI should trades at a premium to Brent at about $ 1.50 /Barrel since Brent is an imported crude oil.
This situation is caused by local factors which result in low correlation with markets conditions abroad. WTI is priced at Cushing, Oklahoma, which is too far from the centers of consumption and processing, and fail to reflect the economics of oil in the United States. For this reason, WTI is not in line with other crude oils and is increasingly exposed to criticism.
Platts has offered an alternative designed to cope better with the economics in the US and to better reflect market prices in the US Gulf Coast. Platts has proposed as and alternative the crude oil quotation ACM (American Crude Market). The basket is composed of four crude oil grades: MARS, Poseidon, Southern Green Canyon and Thunder Horse in the US Gulf Coast and transported to shore by pipeline. Gulf coast has close ties with the global economy of oil and the refineries take crude deliveries from foreign markets at a rate that depends on world prices.

— Could you give a forecast of world prices until the end of the year?

— It is expected that until September the prices will be around $ 60-70 per barrel. We are seeing a sharp increase in the interconnections of the financial and oil markets. There has been an outflow of capital from the stock market and real estate market followed by an inflow into the commodity markets. Currency and oil markets are closely linked. We have seen high prices at 60-70 dollars and the high volatility in the context of problems with the US dollar exchange rate.
However, it can be expected reduction of the prices in autumn — because of financial crisis which could then affect again the demand for commodities making the prices weak again. Some economists have said that oil prices could be within the limits of 50-60 dollars per barrel.

— Is there a connection between the decisions of the U.S. Commission on Trade with futures and the decisions that were taken in respect of speculative capital on the London oil market on the one hand, and last year’s collapse of oil prices on the other?

— I believe that legislative decisions don’t lead to a change in the nature and structure of commodity markets. Last year, as we saw, prices were close to $ 150 dollars for barrel and the world governments were very concerned about that price level. But as economics teach us, high prices resulted in a softening of demand as there is no better cude for high prices than high prices. In other words, as prices rose, gasoline and jet fuel consumption fell, for example. This happened not because of any legislative move or the pressure on the speculative structures and hedge funds. The prices fell because prices were high and demand fell. Americans were driving less and in the airline industry some airports saw a drop in passengers equal to what it was 15 years ago.

— Of course, a state may restrict or remove from the market any particular financial institution but this is not going to have any lasting impact as the oil market is global. If Russia or the United States behave unfriendly towards the market players, then these players will move to more market frendly countries which could be Switzerland or the UK.

Following the collapse of Enron, there were a lot of legislative initiatives in the USA, which resulted in many financial players moving to the London financial market. And the U.S. then had to ease the sanctions somewhat to ensure the move did not turn into a stampede.
The same is the case today. It is possible that the United States will increase regulations but after a while it will reach a new balance.

— The U.S. leadership has announced that physical market will be under regulatory control. Will this affect the work of your agency?

— The United States has made numerous statements that it will try to regulate markets more tightly but so far it is referring only to futures or derivative markets.
We are not expecting a direct impact as we are an information agency, and therefore we enjoy freedom of expression. In any case, we will always meet all legal requirements.

— There was presented in detail the electronic window of Platts at the forum. Is this platform, in your opinion, just an information system or it is an electronic trading platform?

— Of course, first of all Platts is an information system. However, it gives the buyer or seller the opportunity to meet each other within the electronic system. For a trader it is a tool that will enable him to trade and meet his counterparts more directly.

— We are closely monitoring the situation and trying to see if we can be helpful. For instance, at the stock exchange in St. Petersburg there are efforts to trade many products and therefore we are observing but there is still a lot of work to do. I don’t expect anything to happen this year. However, will explore further the exchange platforms and the opportunities they provide. The same applies to the electronic trading platforms, particularly the platform «Gazpromneft». It is necessary to carefully examine their work, methods and the software they use.

— At the forum you informed about the plans of launching the quotation of oil, which will be delivered by ESPE pipeline to China. Please, tell us more about this quotation.

— Of course, the new route becomes operational and deliveries are made there is a need to create the mechanisms for the market to define the price of the oil. Currently, there is no particular specification of oil, and this will be known as the oil is exported. Platts has a lot of knowledge and experience, so we are prepared and have committed to quote the new oil.
Previously we have decided to name this new potential class ESPO, i.e. East-Siberian Pipeline Oil. We plan to get data from Russian companies and Russian government on the basic quality parameters: specific gravity, sulfur content. It is also important to make sure that the export blend will be stable. Thus, we will have to work very closely with the exporters, in order to promptly initiate an actual determination of the market price.
Some of the oil will be sold into the spot market and Platts will be tracking the market price. And we have all the necessary tools to ensure we assess the crude oil properly.

By Ilia Alkov