Publications: Notes at the Margin

Derivative-Caused Chaos; Finding a New Global Crude Benchmark (March 14, 2022)

This Notes at the Margin addresses two topics. The first is the cause of the oil price volatility that occurred last week.


We follow that discussion with our commentary on the Brent crude oil price benchmark. S&P Global Platts has offered yet another proposal in its efforts to keep its Dated Brent benchmark alive. It will fail as the others did for one reason: there is no oil and, where there is no oil, transactions can be dangerous. The LIBOR crisis demonstrated this, costing banks billions, with some money paid to bond buyers despite high hurdles tied to an obscure Supreme Court decision titled “Illinois Brick.” Oil companies that continue to play Platts’ game risk being fined for far larger amounts, particularly by a consumer class that has a strong standing: airlines.


We need a new benchmark, one tied to the futures markets. Argus Media recommends the ICE Brent contract. This is a workable solution. After all, ICE has won the approval of regulators to administer the LIBOR successor. The one potential drawback to the ICE Brent contract is the much-diminished light sweet crude production in the North Sea. One answer to this would be to adopt a fixed formula for sweet crude based on products trading in Europe. A “gross product worth” measure would be readily understood. Furthermore, European markets have sufficient competition to keep the product index from being easily manipulated as banks did with LIBOR.


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