The most actively traded oil futures contract in the world is being challenged by a new oil benchmark that aims to better represent the mix of crude oils most often used in the U.S. Platts, a division of McGraw-Hill ( MHP) and a leading publisher of energy data and analysis, is planning to launch the Americas Sour Marker, or ASM. The ASM will be correlated with sour crude types in the Gulf Coast region instead of West Texas crude oil at Cushing, Okla., as is the West Texas Intermediate oil futures contract that is traded on the New York Mercantile Exchange. Platts asserts that the energy industry needs a new oil benchmark because production and refining of light, sweet crude is becoming increasingly uncommon in the U.S. "There is a growing market consensus that WTI, priced at Cushing, Oklahoma nd usually viewed as a global reference price, is in fact functioning more as a local, landlocked crude with an increasingly tenuous relationship to the larger U.S. and international markets," according to Jorge Montepeque, global director of market reporting for Platts. "The U.S. is in need of a strong benchmark to reflect physical market economics in the primary refining and production areas of the Gulf Coast," Montepeque said. "We believe that need has become more urgent and that the Americas Sour Marker will provide a valuable representation of market value for crude oil in the Americas." The Nymex is adamantly defending the WTI futures contract and the role that it plays in setting the dominant market price of crude oil around the world.
"We believe that the Nymex WTI benchmark contract continues to serve the marketplace as an accurate and reliable price discovery mechanism," said Anu Ahluwalia, associate director of communications for the CME Group, which owns the Nymex. "The liquidity and transparency provided by WTI is unmatched by any existing or proposed marker." "If anything, if it is successful, Platts' marker will displace dated Brent, not WTI," added Ahluwalia. While switching to a new benchmark may seem logical to energy investors, convincing energy markets to drop WTI and adopt the ASM will be a daunting task. "Unless the Platts ASM benchmark is a tradeable contract on a platform like the Nymex or the ICE Exchange, it will never become a replacement for WTI," says James Williams, energy economist at WTRG Economics. Convincing the Nymex or the IntercontinentalExchange to adopt the Platts contract is highly unlikely. Both exchanges have their own proprietary oil contracts that would openly compete with the ASM if it were a tradeable contract. However, Williams doesn't fault Platts for trying to challenge WTI. "It is sour crude, and not light, sweet crude, that is the dominant crude oil in the United States," he said. "If the Nymex was smart, it would swap out the existing WTI contract for a new sour crude contract with a delivery point on the Gulf Coast instead of at Cushing." If the Platts ASM were to be adopted by energy traders over WTI, energy stocks would be affected, according to Williams.
"An active sour crude market would be more exposed to international supply and demand fundamentals, so price movements in a sour crude market would more accurately reflect their true impact on oil companies," Williams said. "Since sour crude is more expensive to refine, a market switch to a sour crude benchmark would likely see a jump in the global market price for crude oil." In the short term, such a move would benefit companies like Exxon Mobil ( XOM - Get Report), ConocoPhillips ( COP - Get Report), Chevron ( CVX - Get Report) and BP ( BP - Get Report). However, refining stocks like Valero ( VLO - Get Report) and Tesoro ( TSO) could be wounded by the switch.