Sunday, October 30, 2005
Oil traders on edge as Shell tightens Oman grip
SINGAPORE: Shell’s new annual Oman crude oil sales contract will give the major more control over Asia’s most important benchmark grade, raising questions about its reliability as a marker, oil refiners said on Friday.
But they say it is yet to be seen how the trading arm of the world’s third-largest oil company will utilise its new option that allows it to determine which months some of its customers will receive their cargoes. “They will have more control over the market for certain, but how much control they will have we don’t know,” a North Asian refining source said.
The changes were unveiled last week, when Shell told oil traders and refiners who buy its Oman cargoes it would lower the price but impose new restrictions on timing. Shell sells around 100-plus Oman cargoes via annual contracts.
“The market was expecting the offer to be higher than what we termed this year, but instead we gave them a lower price band,” said Michael Ng, Shell’s Business Manager, Crude Trading East. “At the same time there is tradeoff, with the lower price we have taken away some of the flexibility.” Shell’s annual sales represent about 20 percent of the Oman stream, whose price helps determine the benchmark for more than 12 million barrels per day (bpd) of Middle East exports to Asia, typically based on the average of monthly Oman and Dubai prices.
Customers who commit to four cargoes a quarter will get one per month, plus a fourth under a nomination process that is ultimately decided by Shell; lifters who buy only one or two cargoes a month will be more dependent on Shell’s decisions. Unspecified cargoes are to be nominated 60 days in advance of preferred loading by lifters, with Shell sending confirmation — or rejection — no less than 45 days before loading. In previous years, loading months were mostly decided at the beginning of the year.
To offset this, Shell trimmed its price for next year to a premium of between 2 and 4 cents a barrel to the Ministry of Oil and Gas (MOG) official price, down from a 5-cent premium in 2005.
Traders said the impact of the new option-based offer system could only be assessed next month when lifters started to plan for their January-loading programme. “We have to watch to see how reduced supplies and Shell’s seemingly greater control over the movement and pricing of cargoes will have on Oman as a benchmark,” a trader with a Japanese refiner said.
Ng said the revisions came after consultation with its lifters. “The Oman market is a lot bigger than (Shell), there are trading companies moving large Oman cargoes through their books, I don’t think our revision is going to affect it (Oman) as a benchmark,” he said.
Smoothing prices: Some oil trading sources said the new restrictions might be aimed at smoothing out distortions that regularly plague the Oman spot market, which is far more liquid than physical Dubai crude, making it a better lever for influencing benchmark prices.
“The options were most likely put in place to help Shell lock prices into a band,” a trader with a Taiwanese refiner said. This year, Sinopec Corp. — Asia’s biggest refiner and a growing player in the Oman market — helped knocked the grade to its lowest levels in years by aggressively re-selling cargoes into the spot market.
This pressured Oman price differentials into a steep discount of between 60 and 70 cents in the second and third quarters. Sinopec, the biggest-single buyer of Shell’s supplies, has already renewed its contract for 20 cargoes this year while state oil trader Sinochem, which sells all its Oman to Sinopec, has quadrupled its contractual supplies to 16 cargoes for the year. Royal Dutch/Shell has a 34 percent share in the Oman crude stream, giving it about 235,000 bpd of the grade, of which traders estimate it sells about 150,000 bpd on annual contracts.
The Oman government holds 60 percent of the equity — which it sells via term contracts and also keeps for its domestic use — although it notified customers last month that it would reduce term sales next year to feed a 75,000-bpd refinery, which is set to start operations by mid-2006. reuters