Commodity Online
HOUSTON: Long-dated Gasoline and diesel swaps in the US Gulf coast and New York markets have begun to migrate to indexing on prices published by Argus Media. Several quarterly swaps transacted over the last week have used Argus prices. These involved petroleum refiners, banks and hedge funds.

The move to Argus follows a change in methodology by price reporting service Platts. From the beginning of June, Platts has calculated petroleum product prices based on differentials to the CME New York Mercantile Exchange (Nymex) using a 3.15pm EST price rather than the 2.30pm Nymex settlement. This move is a departure from the established pricing practice and threatens to disrupt price risk management techniques by breaking the link with the most liquid time of the trading day in the futures market.

Switching to Argus product prices is the easiest way to mitigate the risk associated with flat-price movements in the 45 minutes between 2.30pm and 3.15pm. Argus prices can be hedged using the 2.30pm futures settlement and the trade at settlement mechanism. This is because Argus prices are based on differential trades in the cash market throughout the day, applied to the Nymex settlement price at 2.30pm.

Argus remains committed to indexing cash market trades throughout the day to the Nymex settlement price. Nymex is launching minute markers at 3.15pm EST that could help alleviate some of the flat price risk for the US refining industry, according to some oil industry participants. But in the long term, it is unlikely that these minute markers will be a viable solution to the problem of a 3.15pm "settlement." This is because the US financial crude and products markets remain inextricably bound together at the Nymex settlement.

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The physical crude market in the US already prices on Argus, and Argus physical crude prices link to the Nymex 2.30pm settlement. In addition, a large portion of the liquidity on Nymex is based on spreads between crude and products at the 2.30pm settlement. This spread activity cannot currently transfer to the 3.15pm minute markers.

The European petroleum business hedges extensively using swaps, especially Argus-based swaps for Gasoline and propane. Any shift in the US pricing basis will have an immediate impact on Europe.

"Switching to an Argus-based price formula is one widely discussed solution to the problem of a shift in the basis underlying other published prices. Argus wants the industry to know that it will continue to link US petroleum product prices to the Nymex settlement," Argus Media chairman and chief executive Adrian Binks says. "Companies in Europe need to be aware that US companies are responding by looking at various alternative pricing formulas. They need to be prepared to adapt their own pricing and risk management policies," he adds. (Source: PRNewswire)

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