Price fixing lawsuit as Canada crude falls to $54 below global price

Western Canada Select (WCS) – a blend of heavy oil sands crude and conventional oil – for delivery in December weakened to $41.79 below the US benchmark West Texas Intermediate (WTI) on Tuesday.

By the end of the week the blend recovered slightly narrowing the spread to WTI traded on the New York Mercantile Exchange (Nymex) to $39.90 on Friday.

The global benchmark North Sea Brent – the pricing point for some two-thirds of the world’s oil – settled at $105.14 in Europe on Friday which translates to an effective price for bitumen-derived oil from Alberta’s oil sands of $54.45 a barrel, up from only $51.45 on Tuesday.

The value of Syncrude, a light oil made from oil sands after undergoing an expensive upgrading process, has also reversed fortunes declining to a $14.75 discount to WTI last week, levels last seen in March 2012, against historical trading of a slight premium and periods of as much as $18 above WTI.

While the Canadian blend has fallen further behind the global benchmark, WTI’s discount to Brent has narrowed substantially to around $12 a barrel, halving the $23 gap recorded in December and well below the record margin of $26.87 of September 2011.

Historically US oil has traded at a premium to Brent which is priced in London, but has steadily declined since the Saudis dropped the WTI contract as their benchmark in 2009.

Brent has long been controversial and now a new lawsuit – one of seven US legal actions alleging price fixing in the Brent market – has been launched in the wake of a European Union antitrust authorities raid on the offices of a number of oil majors including BP, Shell and Statoil, energy traders and Platts – the firm responsible for price discovery on the spot market.

The class action claim by four Nymex traders against the oil companies, investment bank Morgan Stanley and traders including Trafigura and Vitol for collusion states “by providing false or inaccurate information and engaging in false or sham trading, defendants undermined the entire pricing structure for the Brent Crude Oil physical and futures markets.”

The US Federal Trade Commission in June launched its own investigation into the allegations.

Unlike the highly liquid futures markets in other commodities and metals which takes place on public exchanges, spot trading in so-called Dated Brent (a combination of four physical crude streams) is largely private and the suit alleges large players can easily game the system and the assessment by Platts, which is not named in the suit.

Nevertheless North Sea Brent which has been developed as a benchmark since the 1980s, is unlikely to be replaced Bloomberg reports:

“Brent is going to remain as the benchmark for the foreseeable future at least, because there is no real alternative to it at the moment,” said Osamu Fujisawa, an independent oil economist in Tokyo, who previously worked for 26 years at Shell and 17 years at Saudi Arabian Oil Co. “It’s very well established, and those who are exposed to it don’t really have a choice but to stick with it.”

WTI or Light Sweet Crude is also undergoing changes with new specs being introduced from end-2014.

Reuters reports the push to tighten the technical specifications and quality conditions for WTI “has taken on new urgency as a surge in highly variable shale crude and growing volumes of heavy Canadian crude flow into Cushing, Oklahoma, the delivery point.”:

The move to change the specifications was prompted, in part, by concern over some in the industry passing off so-called “dumbbell” crudes, oil blended to look like the WTI benchmark that did not run smoothly through a refinery and readily yield oil products such as gasoline and heating oil.

Western Canada Select’s pervasive discount is also not a function of quality. Maya heavy oil from Mexico is of similar quality to the oil sands blend but is priced at a $40 premium to Canadian crude today.

Unlike Canada, Mexico hedges its oil output and in September the Latin American nation locked in the best price for its crude in history at just over $90 a barrel for 2014.