Exclusive Brent oil traders use little-known rules to reroute cargo from the US

By Florence Tan, Alex Lawler and Robert Harvey

LONDON (Reuters) – Major energy traders that trade oil commodities underpinning benchmark Brent have used an obscure clause to divert U.S. shipments from Europe, in a practice that raises doubts about the success of reforms to the price benchmark crude oil.

Brent, the most important benchmark in commodity markets, is used to set the price of more than 60% of crude oil traded globally and underpins oil futures contracts. Its value affects the fuel prices paid by consumers and businesses.

The 2023 addition of US crude to the benchmark had the potential to limit trading possibilities that can distort Brent prices, analysts said at the time. But the reroutes have renewed concern in the market about how well the benchmark reflects supply and demand.

Platts, a unit of S&P Global Commodity Insights, last year allowed U.S. WTI Midland crude delivered to Europe to be included in the Brent price assessment, called dated Brent. This was to boost liquidity as supplies from mature Brent from the North Sea and other oil fields dwindled.

But in recent months, some WTI commodities that were traded for delivery in Europe through the Platts system, known as the window, never arrived, at least five trading sources said, declining to be named because they were not authorized to speak publicly. Subsequent redirection has not been previously reported.

Trading companies that trade US oil have used a clause in Platts’ all-commodity methodology, called a bookout, to change destinations from Europe to Asia or to keep the oil in the United States.

Although allowed by Platts’ rules, the sale and subsequent rerouting of commodities can impact prices, including those of dated Brent, traders and industry analysts said, as it creates a perception that demand in Europe is stronger than it is.

However, Reuters was unable to establish any conclusive link between commodity trading activity and prices over the period.

“The problem is that traders track the delivered transactions and count the barrels arriving in Europe. Those barrels dated Brent,” said Adi Imsirovic, a trader who has published books and papers on Brent and runs consultancy Surrey Clean Energy.

“If you then book those trades, the barrels – which you think were enough and which have already set the dated price – suddenly disappear.”

Platts said it had received no complaints about the practice and was aware of “a small minority of cargoes” changing their sales basis from a cost of delivery, insurance and freight (CIF) to free on board (FOB) ), which can go anywhere. .

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“Such contract changes are typical in many markets,” said Joel Hanley of S&P Global Commodity Insights.

NO DEVELOPMENT PLAN

Trading firms Trafigura, Gunvor and Vitol are among those that have used bookouts to change destinations for WTI commodities traded in dated Brent, trading sources said.

A Trafigura spokesman said: “As set out in the Platts methodology and common among industry participants, we seek to accommodate our buyers’ requests for additional offloading options where market forces dictate cargo diversion.”

Gunvor and Vitol declined to comment.

Platts rates the dated price of Brent based on the cheapest of the five North Sea crudes – Brent, Forties, Oseberg, Ekofisk and Troll – and WTI Midland on that day.

Thomson Reuters competes with Platts in providing oil market news and price assessments.

Imsirovic said Platts should be informed if physical Brent trades are booked because if the initial trade sets the price, Platts may have to adjust the valuation.

Platts does not intend to make CIF to FOB conversions transparent by publishing them, or to retroactively change its valuations if goods change destination, Hanley said.

He said post-trade mutual agreements were normal practice and the fair value of oil delivered to Europe was reflected on the day by CIF trade.

The US regulator Commodity Futures Trading Commission (CFTC) declined to comment, as did the European Securities and Markets Authority (ESMA), which referred Reuters to the Dutch Financial Markets Authority (AFM).

The AFM declined to comment, saying this was because Platts’ benchmark crude is not covered by the EU Benchmark Regulation and the AFM does not oversee it.

SHIPPING TO CHINA

In a WTI deal that closed, Trafigura sold three commodities on Oct. 2, 2023 for delivery to Rotterdam and later negotiated a destination change to China, trade sources said.

On the day, spreads between Forties Brent and WTI crude versus dated Brent widened on strong demand, with Forties hitting its highest level in more than a year, according to LSG data. Platts said WTI and Brent were the cheapest grades and helped set the dated Brent price.

Brent crude futures fell nearly 5 percent and Brent, as measured by Platts, fell 1.8 percent to $94.555 on Oct. 2.

Other trading companies, including Vitol and Gunvor, bought cargoes of 700,000 barrels of WTI on a delivery basis in Europe, which were later converted to FOB, the sources said.

Reuters could not quantify the exact number involved. Platts said it saw six cases of cargo moving from CIF to FOB in 2024 to be combined into a larger vessel.

Jorge Montepeque, who met with Brent and later left Platts and became a critic of the WTI addition, also said changes in cargo destinations must be disclosed.

“One could say that traders’ bidding for WTI commodities helped to distort the perception of demand in Europe, where there was no demand for such commodities,” he said.

Hanley of Platts disagreed, saying it was not possible to create the perception that demand is higher than it is in terms of price, because if you bid more, the seller will accept your offer.

(Reporting by Florence Tan in Singapore and Alex Lawler in London, additional reporting by Robert Harvey, Charlotte Van Campenhout, Chris Prentice and Dmitry Zhdannikov, editing by Simon Webb and Barbara Lewis)