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Platts Open Methodology Forum Dubai October 31, 2006: 

Platts Open Methodology Forum Dubai October 31, 2006

Crude Market Coverage: 

Crude Market Coverage Jorge Montepeque Director, Price Reporting and Assessment

Today’s Agenda: 

Today’s Agenda 0900-1030 Developments in crude oil markets in the Middle East Update on Dubai, Oman and Upper Zakum benchmarks Physical benchmarks and their interaction with futures markets Hedge funds, speculative flows and their impact on markets 1100-1230 Emerging Trends in refined Products Markets Changing specifications: Asia, Europe and US Impact on refining margins: recent trends and outlook Freight price volatility and its bearing on the swaps markets 1230-1330 Lunch break 1330-1500 Petrochemical volatility and Asian Aromatics Developments in the Asian aromatics spot-contract markets Transparency and liquidity in Platts Asian BTX window Mideast-Asia netback: what Middle East participants need to know


Introducing Platts Transactions Assessments Market Reports Breaking news Platts is a specialist energy publisher founded by Warren Platt nearly 100 years ago, and owned by publisher McGraw-Hill Impartial and independent

What we will be discussing: 

What we will be discussing Recent price performance and the impact of speculative flows Benchmarking Middle East crude oils Physical crude and the development of futures markets

Market drivers 2001-2006: 

Market drivers 2001-2006 Rampant oil demand growth, particularly in Asia Background of strong global economic growth Limited spare production capacity outside Middle East A constrained refining environment Speculative investments in energy markets But… There is nothing like high prices to cure high prices

Crude Price Behavior: 

Crude Price Behavior

NYMEX Crude Open Interest: 

NYMEX Crude Open Interest

ICE WTI Contract: 

ICE WTI Contract

Total WTI Open Interest: 

Total WTI Open Interest

ICE Brent Open Interest: 

ICE Brent Open Interest

Total Crude Oil Open Interest: 

Total Crude Oil Open Interest

Follow the Money: 

Follow the Money

Gasoline Fundamentals: 

Gasoline Fundamentals

Gasoil Fundamentals: 

Gasoil Fundamentals

Short Term Crude Fundamentals: 

Short Term Crude Fundamentals

Long Term Crude Fundamentals: 

Long Term Crude Fundamentals

Price: Bearish Factors are ample: 

Price: Bearish Factors are ample Fact: Inventories are growing Fact: Markets are in contango Fact: Price is under pressure Fact: Governments worried about inflation Fact: Rising interest rates Fact: Production outside of OPEC rising Fact: Instability in key producing areas Fact: Demand continues to grow Fact: Economic growth is softening

Futures Market Initiatives: 

Futures Market Initiatives NYMEX launched fuel oil contract in Singapore NYMEX launched Urals contract DMCC launched fuel oil contract in Fujairah DME plans to launch Oman physical contract ICE considers Urals contract

Pricing Structure: 

Pricing Structure Wet Cash Options Futures Benchmark-Related Physical Pricing

Benchmarking Middle East crude: 

Benchmarking Middle East crude


Criteria for benchmarks Production volume Open trade free of bottlenecks Fungible quality Wide equity and customer base Market liquidity Price Transparency Market forces determine price Price cannot be dictated by any single party

Use Of Platts In Pricing: 

Use Of Platts In Pricing Platts benchmarks are used to price term contracts Futures settlements are often tied to spot market Derivatives “price out” against Platts spot price assessments


The Traditional Benchmarks

Benchmarks for the future: 

Benchmarks for the future


Pricing mechanisms

Physical and forward markets: 

Physical and forward markets

Brent market structure: 

Brent market structure Brent Blend is a crude oil produced in the UK North Sea. It has become an important international benchmark price for the oil industry. Most crude oil produced in Africa, the Middle East, the North Sea, the Mediterranean, Russia and the Caspian is tied directly or indirectly to the Brent price.


Market equilibrium A commodity can only have one value at a particular point in time In an efficient market, buyer will buy from most competitive seller In an efficient market, seller will sell to most competitive buyer The price basis (futures-linked, quotes-related or fixed price) doesn't change the price

Dubai benchmark: 

Dubai benchmark Platts introduced partials in the Dubai market in February 2004 Platts introduced alternative delivery of Oman against Dubai in November 2001 Partials mechanism introduced to enhance liquidity, make price discovery more robust Wider Oman to Dubai spreads created the need for an alternative delivery grade

Introduction of Upper Zakum: 

Introduction of Upper Zakum Proposal to include Upper Zakum published in January, 2006 after extensive discussion throughout 2005. The mechanism provides the seller the option to declare Upper Zakum or Oman for alternative delivery into the Dubai contract upon execution of a transaction. Subscriber Note: Platts will widen its alternative delivery mechanism for its Dubai crude oil assessments through the inclusion of Upper Zakum as an additional alternative delivery grade to Oman from February 1, 2006.

Reasons for the inclusion of Upper Zakum: 

Reasons for the inclusion of Upper Zakum Production of Dubai continues to decline (100,000 b/d) Oman/Dubai spread typically over $1.00/barrel Upper Zakum is closer in quality to Dubai than Oman Upper Zakum production is scheduled to increase Introduction of Upper Zakum increases volumes Upper Zakum and Dubai have similar sulfur content Crude is loaded in the same vicinity as Dubai Current Upper Zakum production of 500 kb/d will rise Exxon equity will amount to 28% for new production Third party equity is free of destination restrictions

Dubai production ownership change: 

Dubai production ownership change Dubai will directly control offshore oil resources Transfer to come into effect by April 2, 2007 Dubai will continue to be freely traded Too early to say if production declines will be halted

Upper Zakum and Oman: Long-term outlook : 

Upper Zakum and Oman: Long-term outlook Upper Zakum, estimated 20-bil/bbl of recoverable reserves Production will increase to 750,000 b/d Oman 700,000 b/d and falling 5% year-on-year Sohar refinery will further reduce spot availability Market distortions observed when production underpinning benchmark generations drops below 500,000 b/d Sum of Dubai, Upper Zakum and Oman keep volume for key Gulf Sour benchmark significantly above 1.0-mil b/d production

Middle East Crude Qualities: 

Middle East Crude Qualities

Gulf Sour: Exxon sells Zakum on Term: 

Gulf Sour: Exxon sells Zakum on Term (Platts, May 8, 2006) ExxonMobil has concluded term contracts to sell its Upper Zakum equity crude entitlement resulting from an agreement with the United Arab Emirates that gave the major a 28% stake in the 550,000 b/d oilfield, industry sources told Platts Monday. ExxonMobil's sales do not have a destination restriction, sources said. At least four counterparties ranging from North Asian refiners SK Corp and Unipec to independent trader Trafigura and Spain's Repsol YPF have signed up to lift cargoes between July and December this year, according to market participants.

Gulf Sour: Upper Zakum physical convergence: 

Gulf Sour: Upper Zakum physical convergence (Platts, July 18, 2006) Trading house Glencore became the first company to nominate an Upper Zakum cargo following physical convergence of the benchmark Dubai partials crude contract, said Glencore Tuesday. Glencore nominated the September-loading Upper Zakum cargo after selling the nineteenth Dubai partial (25,000 barrels) this month to Shell, with physical convergence taking place at 475,000 barrels, or 19 partials. Glencore sold a total of 75,000 barrels of Dubai to Shell Tuesday.

Gulf Sour: Example of cargo convergence: 

Gulf Sour: Example of cargo convergence (Platts, July 25, 2006) Abu Dhabi's Upper Zakum crude was nominated as a substitute-delivery grade against the Dubai benchmark for the second time this month, when trading house Mercuria declared Upper Zakum to Shell following physical convergence in the Dubai partials crude contract, both companies confirmed Tuesday. Mercuria nominated the September-loading Upper Zakum cargo after selling the nineteenth Dubai partial (25,000 barrels) this month to Shell, with physical convergence taking place at 475,000 barrels, or 19 partials.

Partials mechanism: 

Partials mechanism Dubai and Oman are assessed using “partial” trades Trades are done on 25kb clips Bbls are wet only when it reaches 475kb between a single buyer and a single seller ‘Dry’ bbls are settled based on the last day of month’s quote Partials mechanism allows wider participation, more precise price discovery

Report card: Dubai/Oman partials: 

Report card: Dubai/Oman partials

Dubai/Oman partials participation: 

Dubai/Oman partials participation Shell Unipec BP SK Energy Arcadia Petraco J.Aron Sempra Phibro Mercuria Chevron China Oil Morgan Stanley Sumitomo Total Itochu Vitol Mitsui Koch Glencore Mitsubishi Corp

Minas partials: 

Minas partials Launched July 2005 First physical convergence July 2006 Indonesian ICP reset.

Minas Partials: physical convergence: 

Minas Partials: physical convergence (Platts, July 27, 2006) Asia Pacific medium sweet crude benchmark Minas partials reached physical convergence of 200,000 barrels for the first time since Platts introduced the Minas partials contract in July 2005, according to Platts data Thursday. Second convergence for September lifting.

Minas as a Benchmark: 

Minas as a Benchmark Minas can be prone to price swings. Declining production/exports, under 300,000 b/d M+2 methodology change has had some restraining effect on volatility Explore alternative delivery grades to shore up Minas as a benchmark (BFO, Dubai/Upper Zakum/Oman model) Vietnamese grades, quality/geographical differences

Minas as a Benchmark: 

Minas as a Benchmark Minas physical convergence in July Indonesian amends ICP formula effective October 6 Platts (47.5%), RIM (47.5%) APPI (5%)


Market on Close Named companies Firm bids/offers Open to market at large Real-time price formation Defined audit trail Performance-based



Assessment Process: 

Offers Bids 16:30 assessment Assessment Process Cut-off for new bids/offers


Questions? Jorge Montepeque +44-207 176 6136

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