ICE Futures Europe, home of the Brent oil benchmark, has confirmed it is planning to launch a parallel Brent contract to prevent a disconnect between the derivatives and physical markets after a change in the way oil prices are calculated.
Platts, the pricing agency that acts as the de facto regulator of the Brent physical market, announced earlier this month that it would overhaul the formula it uses to estimate the cost of the oil benchmark from January next year.
The agency, a unit of New York-listed McGraw-Hill, said it would widen the assessment period used to calculate the price of the commodity in the physical market from the current 10-21 days forward period to a new 10-25 days forward period. Oil traders said the wider assessment window - a response to falling North Sea oil production - would disconnect the physical market from the futures market, which for historical reasons is based on a 10-15 days forward period.
ICE said on Wednesday that it has launched a consultation process with the industry to introduce a new contract, called Brent NX - which stands for new expiry - in the fourth quarter of the year. The first Brent NX would be for delivery in February 2013. The consultation process will run until October 21 and ICE plans to announce its decision afterwards.
The exchange said it hoped that the year-long period before the first delivery would allow traders to switch their positions from the existing ICE Brent futures and options to their equivalent ICE Brent NX futures and options.
It is important that the Brent physical and derivatives markets continue to develop together to reinforce Brent's role as the leading crude oil benchmark for global market participants, said David Peniket, president of ICE Futures Europe.
Oil traders worry, nonetheless, that the wait until 2013 for the new Brent contract will reduce liquidity in the derivatives market. Royal Dutch Shell, which took the rare step of publicly writing to Platts asking to delay the change until early 2013, has warned that the overhaul in January could prove disruptive for the derivatives industry.
We maintain the January 2012 timing announced by Platts ... is likely to cause issues with the futures market, Shell, the top participant in Brent oil, said earlier this month.
The changes come at a crucial time for the Brent contract, which is gaining market share at the expense of other oil benchmarks. The modifications announced by Platts and ICE are the latest of a series over the last two decades. As production fell, the original Brent crude benchmark was combined with Ninian crude in 1990, creating the so-called Brent blend. In July 2002, Platts broadened the Brent contract with the inclusion of two other regional streams: Forties and Oseberg. Ekofisk was added in June 2007, creating today's Brent benchmark, also known as BFOE. According to Houston-based consultants Purvin & Gertz, Brent is the benchmark for as much as 65 per cent of the worlds crude trade.
The Financial Times Limited 2011