OPEC to create new benchmark 'to reduce the very high levels of speculation'

Nov 24, 2000 01:00 AM

OPEC President Ali Rodriguez said the organisation has agreed to create a new global oil benchmark to challenge speculation on futures markets, which he blamed for distorting prices. However, oil industry analysts poured cold water on the idea, accusing the 11-member group of trying to turn back the clock on a huge financial derivatives market.
The crude oils now used as a reference price for the world's market of 76 mm bpd - Brent Blend, West Texas Intermediate (WTI) and Dubai - represent just 1 mm bpd of output, Rodriguez told a university forum. "We want to create a new basket (of crude oils) to be used as a global benchmark in order to reduce the very high levels of speculation," said Rodriguez, who is also Venezuelan Energy and Mines Minister.
"The idea has already been accepted unanimously in OPEC and we are talking to some consumers, who welcome it," he added. OPEC this year set a price target of $ 22 to $ 28 per barrel, but has been unable to push prices down into this range despitefour output hikes this year.

OPEC blames speculation for keeping prices consistently above $ 30 per barrel, while futures traders say the high prices reflect concern about possible shortages of some refined products in the United States this winter, and the Arab-Israeli conflict. Rodriguez said he would make the benchmark a priority once he becomes OPEC Secretary-General on January 1. The new basket could include OPEC crudes and oil from non-OPEC countries, he added.
Industry analysts were sceptical, saying any new benchmark must be based on a single type of freely-traded crude oil. Some OPEC countries do not allow trading of their crude oil on open markets.
OPEC would find it hard to generate sufficient liquidity in any new benchmark, they added, to compete with a multibillion dollar market in financial derivatives where prices are now decided by means of futures, swaps and options. OPEC gave up the power to set the price of its exports during the oil shocks of the 1970s when it adopted new outside benchmarks to take advantage of high prices.

Since then, "price discovery" has shifted from physical markets to forward contracts and futures because these instruments permit higher levels of liquidity and credibility. Oil futures trading on exchanges in New York and London now reaches 150 mm bpd, double the volume of oil produced in the world.
Rodriguez said he wanted the new benchmark to reduce speculative price moves, both on the upside and downside, which he blamed for distortions of up to $ 8 per barrel. "The objective is a new benchmark which better reflects the physical market," he told.

Source: Gulf News Online Edition
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