Saudi Aramco Drops WTI Peg.

Saudi Aramco on Oct. 28 decided to drop the widely used WTI contract as the benchmark for pricing its export crude oils, dealing a serious blow to the New York Mercantile Exchange (NYMEX). The decision by the world's biggest oil exporter could encourage other producers to abandon this benchmark and threatens the dominance of the world's most heavily traded crude oil futures contract. It is the main contract traded on NYMEX.

The move reveals the growing discontent of Riyadh and its US refinery customers with paper WTI after the price of this paper commodity became separated from the global oil market this year. The surge in oil inventories in Cushing, where WTI is delivered into the US pipeline system, depressed the value of the crude's paper contract against other global benchmarks, throwing the global oil market into disarray.

In January paper WTI, which usually trades at a premium of $1-2/b over the price of paper Brent, fell sharply, leaving it at a discount of almost $12 - a record gap. This dislocation in the market continued well into the summer.

From Jan. 1, 2010, Saudi Aramco will base the pricing of its US-bound crude oils on a new index developed by Argus, the London-based oil pricing company. The Argus Sour Crude Index will track the price in the physical market of a basket of US Gulf Coast crude oils, including Mars, Poseidon and Southern Green Canyon.

Argus said the change in policy reflected the "increased importance of the US Gulf coast sour crude market, in which both production and trading activity was rising sharply". Paul Horsnell, head of commodities research at Barclays Capital in London, said Saudi Aramco's decision was likely to reflect a "wider discontent" from its customers in the US about paper WTI's performance. ExxonMobil, Marathon and Valero are among the biggest US buyers of Saudi crudes.

Edward Morse, chief economist at LCM Commodities in New York, said: "It is a recognition by large players that [paper] WTI sometimes does not reflect the true value of crude oil in the water-borne market".

Saudi Aramco has priced its US-bound crudes using WTI since 1994. The price was based on quotes from the physical market which were compiled by Platt's, a unit of McGraw-Hill. Oil companies then covered their exposure to WTI using the futures market on NYMEX.

Bob Levin, managing director of market research at the CME Group-owned NYMEX, said the exchange was ready to move with the market, adding: "We plan to introduce a cash-settled futures contract tracking the new Argus index". Mike Vinciquerra, equity research analyst at BMO Capital Markets, said the new Argus index would not replace WTI. He said: "It's more a supplement".