Simplifying the complex
Market stress in the spring of 2020 demonstrated the need for a new price reference reflecting the value of high-quality Permian supply at the nexus of the domestic and global market. Matt Eversman discusses how S&P Global Platts addressed this challenge with a new benchmark, Platts AGS.
In the wake of a historic dive into negative figures on April 20, the oil industry called for an alternative to pricing at the hub of Cushing, Oklahoma.
S&P Global Platts responded by putting to work its expertise in cargo markets to design a methodology that would simultaneously provide clarity into what is being valued and a broad, regional representation of price.
Platts AGS, the US’ new waterborne crude benchmark, clearly demonstrates the value of a defined grade within a specific trading framework, bringing structure to a regional market previously characterized by one-off deals.
The tension between liquidity and precision is an important consideration in the development of a new US crude benchmark. Higher transaction volume does not improve the usefulness of an assessment if it undermines clarity and precision. On the other hand, an overly specific assessment may not reflect a broad enough segment of the market to provide a trustworthy representation of price.
To take an extreme example, consider a US Gulf Coast crude assessment that calculates a volume-weighted average based on information from a basket of pipeline and cargo trading locations in the Gulf Coast, normalized based on historical spreads to a single terminal. This assessment could advertise significant liquidity, but would that liquidity come at the expense of clarity and precision? The proportion of market information from different locations and from pipeline versus cargo trades would fundamentally change the kind of market the assessment represents each day. And that’s not a problem you can solve through a normalization process based on historical price differences.
The other extreme would be a futures contract with physical deliverability at one or a few close-proximity assets. This pricing mechanism would be clearer and more precise, but would not provide a regional representation of value. Limiting deliverability to a small group of assets, while positive for clarity and precision, excludes liquidity. And because of the financial-to-physical convergence inherent in these types of contracts, there is no flexibility for an assessment process to determine value from nuanced market information.
Following in the footsteps of other waterborne benchmark ecosystems – Dated Brent and Platts Dubai – Platts AGS strikes the balance between the “anything goes”, volume-weighted average approach and the overly restrictive physically deliverable futures contract examples. The assessment provides total clarity into what is being valued and under what trading circumstances. In addition, it captures a large swath of transaction volume and the entirety of the US’ main crude exporting region without distorting value.
To get there, Platts worked with the market to develop solutions for two key methodology challenges.
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