HOUSTON/SINGAPORE (Reuters) - Royal Dutch Shell PLC on Thursday called for tougher regulation of the Dubai crude benchmark, the Middle East's most important oil-pricing mechanism, after record trade volumes skewed prices.
Industry players have been calling on pricing agency Platts to review its Dubai assessment, saying record trading by Chinese state companies in August during the Market-on-Close process pushed liquidity to the limit and disrupted Dubai's relationship with other global benchmarks. The Dubai marker sets the prices for more than 12 million barrels per day of Middle Eastern and Russian crude exports to Asia.
"Regrettably, there have been times in recent months where the price of Dubai (crude) was assessed well in excess of the fundamental refining value of other comparable Middle Eastern crudes," Shell said in a statement.
The Dubai benchmark is set based on sales of three Middle Eastern grades. The record trading between Chinese state traders Chinaoil and Unipec changed the relationship between Dubai and the other global oil benchmarks, Brent in Europe and West Texas Intermediate in the U.S.
At the time, both WTI and Brent futures showed a contango market structure, when prices for prompt supply are cheaper than for later delivery, demonstrative of an over supplied market.
However, the buying interest from Chinaoil pushed the Dubai market into backwardation, when cargoes in the prompt month are more expensive than future months, indicating tight supply. Prior to Chinaoil's buying, Dubai was also in contango.
Shell's statement argued that the Asian crude oil price is not subject to oversight as rigorous as benchmarks in other regions, since the onus to ensure a fair market lies with price reporting agencies rather than regulators.
To level the playing field, Shell is calling for position limits and clearing procedures, similar to those in North America and Europe.
"There need to be safeguards to prevent the risk of distortion and to ensure the Dubai benchmark price mirrors true market supply and demand fundamentals," Shell said.
To address liquidity concerns, Platts announced in mid-November that it will add Qatar's al-Shaheen and Abu Dhabi's Murban crude to its Dubai and Oman benchmarks from January 2016.
"We are focused on the integrity of our price assessments and with these changes, market participants have confirmed our Dubai price assessment will be better positioned to reflect the spot market," Platts' global head of oil content Dave Ernsberger said in an e-mail.
"We are not responsible for policing who buys and sells in the markets."
Platts said it received feedback from more than 30 market participants supportive of their proposals to evolve its Middle East benchmarks.
"These additions ensure the Middle East crude benchmarks will have almost three times as much crude oil deliverable into the benchmark than Brent. Thus far, it would be unprecedented for that much crude oil to be bought in a single month," Ernsberger said.
"However, markets do evolve and if we need to do more, we will consult to broaden the benchmark further."
In May, Shell, along with BP, called on European regulators to refrain from imposing stricter capital requirements and greater disclosure measures on oil trading.
Chinaoil, the trading arm of PetroChina Co, and Unipec, the trading unit of Asia's largest refiner Sinopec, could not be immediately reached for comment.
Platts, a unit of McGraw Hill Financial Inc, competes with Thomson Reuters in providing news and information to the energy markets.
Reporting by Ankush Sharma in Bengaluru, additional reporting by Liz Hampton in Houston and Florence Tan in Singapore; Editing by Christian Schmollinger