Pricing system collapse! Middle East oil price benchmarks distorted due to war, forcing Asian refinery companies to activate "Plan B."

Notice that due to distortions caused by the war, there have been severe price fluctuations in the Asian oil refining market, leading to Asian oil refining companies seeking alternative solutions to the Middle East crude oil benchmark prices. They believe that the current benchmark prices are detached from the reality of the physical market. As the shortage of barrels of oil used to assess prices in the region due to the war, the key benchmark prices in the Middle East have become increasingly volatile; meanwhile, the aggressive purchasing behavior of TotalEnergies in France has exacerbated this turmoil. At one point, the price of Oman crude oil approached $180 per barrel, causing concern on Wall Street, with some believing that the reality of oil shortages is more serious than it appears - followed by a significant price drop. The price increase in the Middle East oil prices surpasses other benchmarks. Asian oil refining companies purchase billions of dollars' worth of Middle East crude oil based on Oman and Dubai benchmark prices monthly, and they are now struggling with a pricing system that many consider to be "malfunctioning". Despite most of the region's production being trapped in the Strait of Hormuz, benchmark prices are still needed to value about 5 million barrels per day of Saudi and UAE crude oil flowing through pipelines to the Gulf and beyond. In private conversations, about 20 oil trading professionals and officials from the world's largest oil-consuming region expressed concerns that due to the exacerbated liquidity issues, they no longer consider the key prices in the Middle East to be reliable. Some individuals expressed concerns that even if the conflict ends, the system may still take time to return to normal. French Industrial Bank analyst Michael Haigh, among others, stated in a briefing, "The impact of the Middle East conflict is no longer limited to damaged infrastructure and supply chain disruptions. It is now distorting the crucial oil benchmarks in the region and putting Asian oil refining companies in a difficult position." Although disruptions have been acknowledged due to the war, the major institutions behind benchmark prices and their related futures trading systems maintain that the price discovery mechanism remains robust. This situation has led to millions of barrels typically traded based on Dubai crude being traded relative to Brent crude instead. Some Asian fuel producers have even taken the unusual step of requesting Saudi Arabia to change the basis for pricing its monthly crude oil sales - to use Brent futures as the benchmark. Using Brent benchmark as the basis for purchases may help reduce the crude oil purchasing costs for Asian oil refining companies, with sellers likely to resist. Under the same conditions, both grades of Middle Eastern crude trade at significantly higher premiums to Brent crude. Ultimately, oil refining companies state that reliability of the benchmark is what truly matters to them, rather than just switching to a lower benchmark. Trading in Brent crude is heavily influenced by European supply and demand dynamics as well as hedge funds and other financial investors. Supply loss The Dubai benchmark relies on trades of five regional grades of crude oil, while Oman crude is purely based on the price of the country's crude oil. However, S&P Global Platts, which evaluates Dubai crude, has had to stop including three of these grades: Upper Zakum, Dubai, and Al-Shaheen, as they are no longer able to enter the global market. As a result, Platts has restricted eligible crude oils to just two remaining varieties available for purchase outside of the Gulf: the UAE's Murban crude and Oman crude, named after the country. The blockade of Persian Gulf crude means that some companies with equity interests in Middle Eastern crude oil are choosing to directly ship their cargoes back to Asia instead of trading. This further reduces the supply of benchmark crude oil. According to informed traders, some Asian oil refiners have started purchasing oil cargoes linked to Brent futures rather than against Middle East benchmarks. Making these tensions even more complicated is the substantial portion of the Dubai benchmark cargoes held by TotalEnergies, which traders say has led to price increases. The company did not respond to requests for comment. Futures hindered Despite the unease among oil refining companies, Platts maintains that its pricing remains reliable. The pricing agency states, "Platts Dubai benchmark continues to have strong liquidity, with buying, selling, and trading participants from across the market. Any buying activity is carried out under openly transparent rules, with Platts applying rigorous regulation and methodology safeguards." The two remaining grades that conform to the Dubai benchmark - Murban and Oman - are supported by the futures markets operated by the Intercontinental Exchange (ICE) and the Dubai Mercantile Exchange (DME), which typically have liquidity. Non-structural issues Data shows that the trading volume of the Oman contract on DME is at its lowest average daily volume since 2007. The trading volume of Murban crude has also dropped to multi-year lows. DME acknowledges that the region's development has posed short-term challenges to physical volumes and trading activity, but states that these issues are not structural. It asserts that its Oman contract will continue to provide robust and reliable price discovery mechanisms, especially during periods of stress. ICE states that the open interest in Murban futures has increased year on year and is expected to rise until 2026, but declined to comment further. In the most severe cases, this turmoil could mean that some buyers who choose to convert contract obligations into physical crude oil may be unable to do so, although there are alternative settlement contract options besides physical delivery. Facing enormous daily price fluctuations, speculators have also reduced their positions in certain futures contracts in the region. The scale of volatility in the entire oil market has limited traders' ability to deploy risk across different markets, with Middle East futures being one of the most volatile commodities in all markets since the conflict began, according to analysts at the Oxford Institute for Energy Studies, Bassam Fattouh and Ahmed Mehdi. "As of writing, the closure of the Strait of Hormuz is ongoing, and the loss of liquidity is undermining price discovery in the entire Middle East pricing system, further price anomalies are likely to occur."