A Shift In Power


Today on CNBC there was an interesting report from the floor of the New York Mercantile Exchange. It was a discussion about the price of crude oil and the interesting part came at the end of the report.

"Saudi Aramco to base its prices on a Argus Sour Crude Oil contract instead of the WTI."

West Texas Intermediate crude oil has long been the benchmark of the global pricing of crude oil and its markets. Now this changing.

Is this a good change?

The report closed out by stating that the NYMEX was starting its own futures contract in response to this based on an index. As soon as I saw this I started thinking about the futures contract itself and the reason for this change.


The Sept/Oct 2009 edition of Foreign Policy magazine has an article by Daniel Yergin about the WTI contract and its specifications “from Louisiana and the Gulf Coast, and from Canada too, into Cushing’s tanks where buyers take title before moving the oil onward to the refineries where it is turned into gasoline, jet fuel, diesel, home heating oil and all the other products people actually use.”

The Cushing is Cushing Field in Oklahoma which started in 1912.  And today, a major trading hub which according to the Yergin article moves about 1.1 million barrels a day or 6% of the U.S. consumption. So this is to be either replaced or at least impacted by the launch of the new Argus Sour Crude contract.

Is this development in the geopolitics of hydrocarbons a cause for concern? I think it is. I’ve not studied the contract specifications for the Argus contract but I’d imagine that the physical delivery point or exchange for physicals would be somewhere in Saudi Arabia. The Yergin article also makes the statement, “But today the real action is on the trading floor in New York.” I’m also questioning whether after the launch of this new contract the action will stay in New York or just move it all to Dubai.

This is definately a shift in power.