CME GROUP INC. By Florence Tan and Rania El Gamal
Iraq's state oil marketer SOMO surprised traders this week by seeking feedback on plans to switch its Basra crude benchmark in Asia to pricing based off the Dubai Mercantile Exchange (>> CME Group Inc) from January 2018, dropping quotes based on assessments by oil pricing agency S&P Global Platts (>> S&P Global Inc).
The move would affect the price of about 2 million barrels per day (bpd) of crude oil supplies to Asia, mainly shipped to India, China and South Korea.
"The change is significant and will be watched very closely by not only Middle East producers but everyone involved," said Oystein Berentsen, managing director for Strong Petroleum in Singapore.
The new method would price Basra crude using the monthly average of DME Oman futures <0#1OQ> two months before the oil loads. Other Middle East producers like Saudi Arabia, Kuwait and Iran price their oils in the loading month.
This means Iraqi crude loading in October would be priced off DME's futures contracts in August. This poses a risk to buyers, who would only be notified by mid-September whether they had successfully bid for a cargo, making it hard for them to hedge against price changes in advance.
"We are not supportive. They need to fix their (supply) programme first, before trying to change the benchmark," said a senior crude buyer at an Asian refinery. He declined to give his name because he is not allowed to talk to media about market specifics.
The different timing on the pricing compared with other producers also makes it difficult to compare values among crude grades, traders said.
Some buyers were concerned that almost 80 percent of the crude used to price DME Oman futures goes to China, reflecting the economics and fundamentals of just one Asian buyer.
"Moving right away to DME Oman is very ambitious. I think it will cause a few hiccups because technically it's going to be very hard," said Adi Imsirovic of Britain's Surrey University Energy Economics Centre.
SOMO has not commented on its motivation for the changes. Switching to DME could extract higher prices for SOMO. Monthly averages for DME Oman held about 20 cents a barrel above Platts Oman-Dubai assessments between March and July this year.
Some traders support the move. Knowing Iraq's crude prices two months before delivery allows traders holding Basra cargoes without fixed destinations more time to decide where to sell their oil, based on regional price differences.
Whether SOMO will go ahead with the move has yet to be determined as the company is expected to resolve issues raised by customers, a source familiar with Iraq's plan said.
Iraq may change the benchmark but keep timing for lifting oil at a one-month gap.
SOMO did not respond to a Reuters request for comment.
Platts, which dominates the global pricing of physical oil, declined to comment on how it would respond to the potential defection of the second-biggest producer from the Organisation of the Petroleum Exporting Countries (OPEC).
(Reporting by Florence Tan in SINGAPORE and Rania El-Gamal in DUBAI; Additional reporting by Nidhi Verma in NEW DELHI; Editing by Henning Gloystein and Tom Hogue)
