Transparency is becoming a major issue for the global oil market

Posted on 16 October 2013

Political and public interest in the oil markets remains high, with concerns that oil prices are subject to manipulation, even though recent academic studies suggest that oil prices are driven primarily by the fundamentals of supply and demand, delegates at the Daegu 2013 Congress were told on 16 October.

Shifts in global and regional oil markets, the trading of oil futures in such emerging financial markets as Dubai and Shanghai, growing Russian energy exports to Asia, and booming the US shale oil production could have a significant impact on price discovery.

“Transparency is becoming a major issue,” said Edward Morse, Global Head of Commodities Research at Citigroup in New York, pointing to the rise of non-OECD economies in the global energy market. “This is the month in which China overtakes the US as largest importer of crude oil,” and the rise of non-OECD markets brings additional challenges in the quality and transparency of data. “China needs to take the lead if the world is going to become more transparent,” he said. To help tackle challenges, the US needs to overcome regulations and prohibitions on the export of crude oil following the boom in shale oil and gas production in recent years.

Speakers said that global oil benchmarks such Brent, WTI, and those published by industry media are still fair and transparent in calculating pricing. “The question is not whether the price is right,” said Jorge Montepeque, Global Editorial Director of Market Reporting for Platts, a leading global provider of energy and petrochemicals information. “It is whether you can have policies that can make the price friendlier towards you.” Montepeque pointed to two big trends that could prompt a change in benchmarks. First, the West is not comfortable with prices that stand at $110 per barrel, while demand from Asia is rising fast, shifting the global landscape. “I wonder what is going to happen in the next 5 to 10 years as markets evolve and maybe benchmarks evolve,” he asked.

The rise of Asian demand “is being confirmed every day, and that means we need a benchmark for Asia,” said Ali Hached, Senior Adviser to the Algerian Minister of Energy and Mining. Speaking from the perspective of an oil producing country, he believed that current oil prices are generally based on the fundamental concept of supply and demand.

If change comes, it may be slow, noted Gary King, President & CEO of Tarka Resources. He cited the “tremendous” risks, enormous amounts of capital, and potentially hostile environments that hydrocarbon companies face. “The oil industry is conservative when it comes to changing practices and adopting new benchmarks,” he said.

This news story is based on the session What Does It Take?, “Oil price discovery: The impact of emerging regional energy markets”, at the 2013 World Energy Congress.