UPDATED: Nymex follows Saudi sour crude endorsement with new contracts

Nymex is to launch two sour crude oil contracts after Saudi Aramco’s announcement this week that it will use the Argus Sour Crude Index (ASCI) as a benchmark for US sales from January 2010.

The CME Group, which owns Nymex, today announced the launch of trading and clearing services for cash-settled trade-month swap futures on the ASCI. Trading is scheduled to begin November 23 on the New York trading floor.

Launched in May by Argus Media, the ASCI represents the daily value of US Gulf Coast medium sour crude, based on physical spot market transactions. The daily ASCI price is the volume-weighted average of all deals done for three grades of crude combined: Mars, Poseidon and Southern Green Canyon. The grades are priced at a differential to the Nymex light, sweet crude (West Texas Intermediate – WTI) price.

In addition, the CME plans to launch a new physically delivered US Gulf Coast sour crude futures contract, which will be listed on CME Globex and CME ClearPort by the end of January 2010. The sour crude futures contract has main delivery grades that closely mirror the ASCI.

Commenting on concerns that a new sour crude contract could usurp WTI’s position as the US benchmark, Bob Levin, managing director of CME Group energy research and product development, said its new contract would enhance liquidity in the current WTI contract by providing producers, commercials and others with a way to price spreads on the sour grades with Nymex WTI.

Addressing Saudi Aramco’s decision to use the ASCI, Amrita Sen, an analyst at Barclays Capital, highlighted the dislocation of WTI from other global benchmarks earlier this year due to logistical constraints and high inventory levels at Cushing, Oklahoma – the delivery point for the Nymex WTI contract.

"[The decision to use the ASCI] is very much a form of insurance against volatility for when WTI becomes dislocated from the rest of the market," she said.

However, the ASCI could establish itself as a new sour crude benchmark, thanks to Saudi Aramco’s endorsement. “It’s not easy getting a benchmark established, but the fact that someone has given a major endorsement to the Argus index might well help it along,” the CME’s Levin said.

This is Nymex’s fifth attempt to launch contracts to enable the development of a US Gulf Coast sour crude benchmark since the early 1990s. The previous attempts have not attracted such an endorsement or enough liquidity.

Saudi Aramco, Saudi Arabia’s national oil company, has used WTI crude prices published by McGraw Hill’s Platts as the benchmark for crude sales to the US since 1994. It will now publish a monthly price differential to a month’s average of the daily ASCI price.

Saudi Aramco’s announcement was initially seen as a sleight to WTI’s status as a benchmark for crude prices. But the fact that the ASCI is priced relative to WTI and the existence of Platts’s own sour crude oil pricing assessment, the Americas Crude Marker means the change is really about pricing methodologies.

“Using the ASCI makes the maths much more direct,” said Levin. “This is about pricing methodologies.”

Argus uses volume-weighted averages of the entire day’s physical market trading to create the ASCI. “This clearly is the most transparent and robust method available for such active markets,” said Adrian Binks, Argus Media’s chairman and chief executive.

Platts' Market-on-Close (MOC) method, on the other hand, which is used for all its US crude oil price assessments, reflects the WTI price at 3.15pm US Eastern Time rather than an average of the entire day’s trading.

According to Kathleen Tanzy, spokesperson for Platts, the organisation has no plans to change its assessment method. “Platts MOC in oil has been widely used globally for more than a decade and offers the most transparent view of price discovery available worldwide, and there is no reason to change that,” she said.

While fears of a challenge to WTI as a benchmark might have been overplayed, Barclays Capital’s Sen said it could have an impact on Brent’s benchmark status. “ASCI could be just as much of a challenge for Brent. Brent is used as the fallback benchmark when WTI gets dislocated, but now there is another option."