Listen: Oil Markets extra: How do benchmarks cope in times of market stress?

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Joel Hanley

Hello and welcome to this first livestream event from S&P Global Platts. My name is Joel Hanley and I lead the oil pricing team for Europe and Africa. I'm very happy to be here today to bring you the latest updates on commodity pricing in this interactive forum over Platts Live and other channels. If you want to get in touch with any questions for our guest today, please tweet them to @SPGlobalPlatts with the hashtag #PlattsLive.

Today, I'd like to welcome Dave Ernsberger from his home on the south coast of England. Dave is our global head of commodities pricing and market insight and is pretty much in charge of all of our assessments, news, analysis and commodity coverage.

Like many market observers, we at Platts have seen precedent for most things over the years. We've seen several cases of sudden incidents. We've seen gradual economic changes over that time. But we've always been able to navigate and continue to make assessments in those difficult waters.

The methodologies that underpin our thousands of daily assessments are publicly available and you can find them on our website. And we always welcome feedback on them. But how do they cope at times of stress? We're going to discuss that with Dave today. Why are we having this conversation, when the markets are so hugely distressed?

Dave Ernsberger

Thanks Joel, very much, for the handover. And like you I'd like to welcome everybody who's taking time out of their day to watch this live or watch it recorded back. Our methodologies and our benchmarks are publicly available and well understood generally, which makes it essential for us and our customers, our staff, our readers and all of our benchmark users to be particularly thoughtful about whether they're performing well; whether they're achieving their goals during this time of monumental market distress. To your question, why are we having this conversation now, and in a little bit more detail, as we sit here together in early May?

The world is approximately 20 weeks into understanding the COVID-19 coronavirus, and we're only really seven or eight weeks into it being a global pandemic. But what a seven-or-eight-weeks it has been. We have seen massive economic distress. We've seen historic movements in everything from debt to unemployment to commodity prices. And like any business, a business that provides insight, news and reference pricing, in the form of assessments and benchmarks, has to think really hard about what it does and why it's doing it, and if the business that you're in – in our case, that's publishing benchmarks, among other things – if we're still meeting market needs.

I think good businesses recognise that when times aren't normal, good benchmark publishers and good assessors of market value take time to take a step back, even in the heat of the moment, and understand and discuss openly when the markets are behaving in historic ways. And I think good businesses take time out to understand that what is working 989 times in 1000 needs to be critically reappraised and re-evaluated in the one in 1000 times when the market is so distressed that normal terms and conditions don't necessarily apply.

It's very difficult to make decisions. It's very difficult to have this conversation when the market is in distress. But the reason we're having this livestream today, and the reason we're inviting this conversation, in some open consultations that we have in our engagements with participants across the marketplace, is because you precisely have to have that conversation in the heat of the moment. It's sort of ironic and challenging. I get, again, whatever business you're in, that the time that you most need to step back for a moment, take a deep breath and think about whether things are still working is when it's most difficult to do so. In the heat of the moment, when times are most distressing and most difficult, it can be very tempting to fall back on the comfort of a methodology or an approach. In the case of providing benchmarks that have served you and the markets well, served us and our customers well for so long, it can be very tempting to fall back on that and be comfortable when the market is distressed. In fact, it's kind of like a security blanket. Like "many things may be different today, but our methodology is not." But that can be a dangerous way to think. And it's my job as the head of all of our content at Platts, and it's the job of all of the leaders who work on my team, to not fall into that trap and to not resort to the comfort blanket of thinking that something that has worked so well, and that the market has embraced for so long, that the status quo should be the default position when the markets are experiencing distress. It's very common.

I should mention we're recording this on May 6. It's very common to think about the biggest, most symbolic moment in the markets, where WTI futures and physical in Cushing fell to minus $40/b at the end of April, as being the symbol of market distress. But although it's by any scale in the commodity markets, the single biggest, most recognizable event of distress, it's by no means the only event where a benchmark has been stressed and put under unparalleled pressure by what's happening in the global economy. Everywhere we look at Platts across other crude markets and North Sea, Middle East, Asia, across other refined product markets all around the world, and as we pan back from that and think about petrochemicals and shipping, LNG, coal, electricity, all of the markets that we're providing coverage for, there is evidence of distress across the total commodity market space. And so while we think a lot about the most famous dislocations that have happened during this crisis, we should be thoughtful about, and we are thoughtful about, the fact that there are dislocations happening, even if not on such a grand scale across all of the commodity markets that we serve. And that's why I, myself and the leaders who report to me, invite the views of everyone in the marketplace, including everyone who's livestreaming with us today, on whether benchmarks are serving their purpose, whether they are our purpose in this time of massive distress, just as they are when markets are no doubt choppy but considerably calmer than they are today.

Before we move the conversation forward into methodology, it is worth remembering why these markets are so distressed. In just eight weeks, what began as a coronavirus in parts of Asia became a global pandemic. We have seen the global economy collapse. And in the case of energy and commodity markets, a few key statistics: Oil demand has fallen by 20%. One in every five barrels of oil that was being consumed is no longer being consumed. And just when oil demand fell off that cliff, supply at the same time would surge to all-time highs. Well, that's beyond the ability of anybody to predict. And that is what has put these markets under so much stress in the last month or so and raised these questions around our benchmarks working properly, and benchmarks in commodity markets in general working properly. And it's a fair question with so much distress going on.

Now as we sit back and think about this environment we're in, we're pleased to say that our key benchmarks, which we are studying intensively every day, are performing well through this stress tests so far. But that is not because we're applying conventional wisdom; we're sleepwalking our way through this economic disaster. We have staff around the world who are analyzing market data, thinking about the information we're collecting. Applying expert judgement, getting feedback from the market so that when we publish our assessment for the value of WTI on the Gulf Coast, or Dated Brent in the North Sea or Dubai in the Middle East or Oman, for that matter, we're combining the best available data. The gold standard of what's testable in the market with judgement, with experience to make sure we're combining everything we know and we hear with everything we can see and learn.

And that hasn't been the case when we look across the space at all of the benchmarks that are out there in the market. When we look at other benchmarks and we look at how they're performing, it's instructive to think that decisions aren't necessarily being made in real time to evaluate the data that's available in the market, to apply concepts like value being a function of time, which are so urgently important when markets are massively volatile on a, not just an hour-to-hour basis, but a minute-to-minute and even a second-to-second basis, when critical analysis isn't being applied. So what's out there in the market and even unconventional approaches to understanding movements of value aren't being brought in in real time. The other benchmarks we see out there in the market are having a tough time. And for sure, this is not a massive back-patting exercise: we have our own challenges to think about it, Platts as well. But when we think about our benchmarks, whether it's our crude benchmarks or indeed other markets where we see this kind of distress, we are every day getting our teams together, our leaders together, to look at what's happening in any particular market in a particular time, and considering the approach we have to collecting data – is it purely conventional wisdom or does it still apply to that situation? And we're analyzing what we know and what we have to make sure we produce assessments that are fit for purpose and aim to reflect value at the most difficult and most stressed of economic times.

It's important to us that certain values prevail. Benchmarks are designed to reflect value. That is the core purpose of a commodity benchmark, or really any benchmark. It's to be useful during normal times and times of distress to understanding what value is. And that's the critical question any benchmark should seek to answer. Understanding that value is a function of time, and it has to be built on really high quality data. And our belief in full transparency, including a fully transparent discussion about our own methodology, is integral at a moment like this, as well as our belief that informed judgement and expert judgement also has a really important role to play. If you talk to any market participant, any trader, any producer, any consumer, anyone in a supply chain, anywhere, they will tell you that what they're doing in the market is as much a function of judgement as it is a function of data and process. So we're keen to be sure – and one of the reasons we are having this livestream today is that we're open to this conversation – we're reflecting on it, and we are alive to the fact that conventional wisdom doesn't necessarily apply at a time of distress like this.

So if we take a step back, just to give an example of one of the key areas where I think it's important to be aware of the fact that conventional wisdom doesn't apply, location basis differences are a hot topic right now. When you look at a list of prices in a publication, when you see a data set and a table on a website somewhere, it's very easy to slip into thinking that benchmarks are just names in a price table, and numbers are just a list on a grid. But actually, every benchmark you see, every price you might analyze – while it has a name and it has a number – in the physical commodity markets in particular, every single one of those represents something different. That's why each one of those exists. And it's important to be able to take a step back, if we use the example of WTI crude futures falling to minus $40/b a couple of weeks ago now, it's important to take a step back and say, "OK, why did that happen?" Is it because the entire global crude market is negatively pricing? Is it because the entire US crude market is negatively pricing? Or is it because one specific location in the middle of the US is negatively pricing?

There are approaches that don't take a moment to take a step back. Compare the data. Think about location differences and understand that, particularly in that example, while we had negative pricing in Cushing, Oklahoma, we demonstrably visibly did not at any time have negative pricing in the US Gulf Coast, never mind the rest of the global oil markets. Our team on that day got together. We all got together and talked about that and we actually published a blog to explain how we assessed the markets that day. The core point being, while there's a relationship that you can observe and assume between different pricing points in the US, they don't apply on a day like that. And they visibly weren't being applied on a day like that. And not thinking through something as core and as foundational as basis differences and location differences can be the death of a benchmark if it isn't thoughtfully measured on any given day. Sometimes an event can be extreme and global. Sometimes it can be extreme and regional. Sometimes it can be extreme and very specific. And it's important for benchmarks to be prepared to break classic relationships and classic longstanding formulas to be able to cope with that. So we're not immune to these considerations ourselves at Platts.

One topic I wanted to call out in our livestream today is that of one of our longest standing, most established, most foundationally important methodologies in the oil markets: we ourselves have launched a consultation around this methodology today and I'm sure we'll have consultations on other methodologies as long as this extreme economic event carries on across the global economy. Just this week we launched a consultation on whether and how we ought to update our netbacks for the Middle East and refined products markets, given the current events in the marketplace. For a little bit of background, our netback prices for the Middle East have been published for really more than 30 years now. They're based on the concept that the value of a refined product trading in Singapore, if you deduct the freight to get to Singapore from key load ports in the Middle Eastern region, you can net back to what an implied value is for those same refined products loading out of the Middle East. That served the market well for 30 years, but we've had a lot of questions and a lot of comments that have come our way just in the last week or two about whether, even though that that methodology has been in place and been effective for 30 years, whether it's still fit for purpose, when it's possible that with surging freight rates on the one hand and low values for refined products on the other, that when you put those two things together, you could get a negative price for the Middle East. In fact, one comment we heard during our review already, which I very much agree with, is that Platts has to take a concerned approach at times like these. These are exceptional times. And, you know, reporting the market and the concept of reporting the market has to step in and even oblige us to be willing to reconsider the way we approach netbacks. The point from this particular person we were talking to is, logic works 99% of the time. And this is the 1% of the time when logic itself has to be thought about really hard. I would go so far as to say logic works 999 times out of 1,000 – but that one in 1,000 time, which makes it even rarer as an event, requires an ability to step back and think about if we need to take a different approach. So we have our consultation going on at the moment on this particular topic and we're inviting feedback right now. Actually, the comment period ends on May 8. So we ourselves, whether it's a day-to-day assessment or a longstanding feature of methodology, are every day right now going through a reappraisal and a re-evaluation of all of those points to make sure that our benchmarks can continue to reflect market value, continue to be useful to the global markets, and that they're open to criticism and commentary from all interested parties in real time.

I mentioned, Joel, before we go to questions for folks on the livestream and others, that any good business is required to think about its core reason for being – its core service to the economy and its customers – at a moment like this. And for us as a benchmark provider and a provider of news and analytical insight, when we think about the benchmarks part of our business, we have to reflect on key questions. And as I myself have met with producers, consumers, traders, governments, regulators, members of the community, as individuals, these topics have come up. And when we're thinking about our methodologies being stressed by this environment, you have to fall back on core points. What is the purpose? What is the role of a price reporting agency? What does an organisation like Platts or any publisher of benchmarks, any provider of benchmarks – be they a PRA, an exchange or any other source of benchmarks – what is their role? What is the purpose that you serve? And as a part of that, what is the point of a benchmark? It's no good to say that the price that we put out at the end of the day did everything it was supposed to do mechanically, and mechanistically speaking, if it failed to provide the core purpose of helping users to understand the value of the broader marketplace.

And then to go a little bit deeper than that – Joel, you know, my role in the organization at Platts and again, the leaders who work for me and other leaders in our business, is to be able to pick these topics up with our teams and remind ourselves that we have to be thinking about principles like these, as well as practices. You know, one of the key points that I wanted to share in the livestream today is that a methodology – by the way, our methodologies on our website can run into dozens, or even in some extreme cases, more than dozens of pages that explain specifications and publishing times – those are all practices that have evolved over many years to help us to be sure, we can publish representative prices. But they're based on principles. They're based on principles of fair access to our staff. They're based on principles of information being equally available to all. And we need to make sure that the principles of benchmarks reflect the value we're also applying.

How do you make big decisions with urgency? If we do at the end of this consultation update our netbacks methodology – that's still going on, so I can't really comment on it in detail – that would be an example of making a big decision with some urgency. And everyone has a vested stake in those decisions. Everybody has to have a chance to comment, but it also needs to be done, I can't emphasize this enough, with urgency. The decisions we make at a time like this in a moment like May 2020 are the decisions that we as individuals and we as a business will be judged on for years and maybe even decades to come. This is the time to show leadership. And what's the right balance between data and judgement? How do we make sure that the data we're collecting is representative, but we're also applying judgement to that data so that as a PRA, as a benchmark publisher, we can continue to serve the markets well? And these are some of the key questions we're asking ourselves, and we're being asked by our customers at this moment in time. And these are some of the key questions that drive our consultations and our daily discussions. So that's our topic for discussion today. I thank you all for bearing with me through a fairly long talk through what the key points are.

Joel, why don't we just go to some questions and discussion. I know we have questions on everything from what might happen in the markets next year. Of course, if I only knew! So I'm happy to go in any direction with the Q&A.

Joel Hanley

Sure, absolutely. We've had a few questions on email already. We still continue to receive some on Twitter, so thank you for those. There's one here: if people want to get a methodology changed, if they don't feel it's reflective of the market, how can they give us feedback?

Dave Ernsberger

So this is a really essential point. We will take feedback any way that people want to give it to us, and that ranges from everything to sending us an email to our email addresses – you'll find those on our website – to talking to somebody you know at Platts, and asking them to put you in touch with the right person to talk to about it. And for every single subscriber note we put out and throughout our website, you'll find contact details available on them. Send us your questions any way you want to and we are committed to getting back to you and having that conversation in real time. You can even email me, if you're at a loss for someone to get in touch with.

Joel Hanley

Thank you for that. We've got a question here: we've seen lots of headlines about prices going negative. Someone's asking, if benchmarks are broken, if they do go negative? Or are they just representing what they are meant to represent?

Dave Ernsberger

Yeah, that's a that's a really important talking point in the markets today. And I would share with all of you here that if a market is demonstrably at a negative value, we will 100% publish an assessment and a benchmark that reflects that. The key point being, a market has to be negative, visibly, for us to publish the assessment in a negative price. In fact, we do publish, on an outright price basis, benchmarks and assessments at negative prices on a fairly regular basis. The Waha gas pricing point in the US gas market is famously negative fairly frequently – this happens in ethane, propane and other markets around the world. It doesn't often happen with a headline benchmark like WTI, or for that matter, Brent or Dubai. But to the question being asked: if a market is negative, it's negative. The point about the methodology is you need to be updating, evaluating, reappraising your methodology, so that if you do publish a negative price, the market you're reflecting was actually negative at the time. But all that being said, if a market's negative, it's negative, and it's our job to report, rain or shine, under a storm or not, where values actually are.

Joel Hanley

Right. And a question that comes up quite a lot is, we have the Market-on-Close for assessing commodity prices, although we have other index assessments and so on. Someone also sent me an email yesterday: market participants are likely to go under due to the economic challenges that many of us are facing right now. In the short-to-medium term, how does that fall in players impact the assessments that we make and the benchmarks that we publish?

Dave Ernsberger

Yeah. Tragically, a number of market participants, thankfully a reasonably small number, but still some important ones have already gone under in this market environment that we're in. And unfortunately, there may be more to come there. And this is a really important question. You know, at Platts, our hearts go out to everybody who's lost their jobs, been furloughed, experienced distress or had companies go down. At this time, it's no light matter at all.

From an assessments perspective and a market coverage perspective, at times like this, it's important, it's one of our core principles around an assessment process, being open to all. Anyone and everyone who's active in the markets that we're assessing can be part of our assessment process, whether they're a subscriber or not. As long as you're in the market, we want to hear from you and make sure we're collecting and publishing your data, because no benchmark, no assessment, should be unduly exposed to a decline in the number of market participants.

So there's two points there for me. First, our assessment processes is by design open to anyone and everyone who is active in a market, whether you're a customer or not. And second, beyond that, another important point. Most of the markets we cover have, on a spot physical trading basis, 30, 40, 50 major participants. That's the nature of the beast in the commodity markets that we cover. Some of the physical commodity markets we cover can even have fewer than 30 participants. So we do keep a very close eye, on a daily basis, and sometimes more frequently than that, on the health that we're aware of, the status that we're aware of, of those participants. So we can be sure we're publishing data from companies that are trading in a normal and market-reflective way as well.

Joel Hanley

Absolutely. And another question, we talk about the MOC – but what other methodologies does Platts do? Are different methodologies suited for different markets?

Dave Ernsberger

Yeah, I think this market distress is showing that different methodologies have different roles to play, even sometimes in similar market spaces. You know, we do have three core approaches to covering markets. We have our MOC assessment process, of which there's a lot of information available online. The short version of that is that we publish transparent data in real time and we produce assessments that reflect a moment in time, while there's a lot more to the story than that. We also have an approach based on survey and source data, where we just contact people to find out what's going on and publish that too, but maybe with not quite the same exacting level of transparency. And we do have volume weighted average indexes as well in certain markets. We're keen to use whichever approach works best for any particular market. Volume weighted averages work best in markets where there's a large amount of data available every day, every moment, and each trade is similar to the next – so very homogenous markets. The vast majority of commodity markets do not lend themselves to volume weighted averaging in quite that way. There are many that do, including US gas, but there are several that don't.

Some of the negative prices we saw published for the US Gulf Coast, not by us, I would add, show the limits of the volume weighted average approach in markets that don't lend themselves to that.

Joel Hanley

Right, we have time for another couple, and this one's about something that's particularly close to my heart, Dated Brent: The main global oil benchmark is at a significant discount to the headline ICE Brent futures that I see on the news, what is the difference there? Why is there a difference?

Dave Ernsberger

Yeah, I think Dated Brent, Brent futures – BFOE, for all the Brent students out there, I won't list all of them – but those different instruments have served the global markets really, really well in a way that maybe some of the other instruments out there haven't quite given the same clarity of view on value. Dated Brent is the value for cargoes in the North Sea 10 days from the day of publishing to a month ahead. So today, from May 16 until June 6, that is the prompt spot physical market where the actual cargoes will be cleared for delivery to refineries around the world, or even for storage in this environment. Whereas Brent futures and forward physical months like cash BFOE are much further forward in time; July lifting. August lifting, September lifting. And that market equilibrium where you see futures and cash physicals and BFOEs trading for deferred delivery and allowing the spot to clear and physical in that Dated Brent market environment – that's allowed these different Brent instruments to reflect both the value here and now in Dated Brent and the value on a forward basis. Keeping those markets clearly delineated has been massively helpful to Brent continuing to serve its many roles in the marketplace.

I would stress, by the way, people ask me all the time – if Dated Brent is lower than Brent futures, does that mean I should change my decisions on which benchmark I use? Just remember where Dated Brent, Brent forwards, are is a function of market structure. We're having a big contango event today. We've had many big backwardation events in the past. The markets will switch between backwardation and contango, so I wouldn't necessarily recommend using market structure as a basis to make a decision like that. Just be aware one's physical and one's financial.

Joel Hanley

And also I think we recently on our website, where you can find a great deal of information, of course, we recently published an FAQ about the difference between Dated Brent and other Brents – there's many, many different Brents. I'm sure the real one will stand up at some point. You can see it on our website, or if you just Google Brent or Platts Dated Brent, you'll find that one that we recently published.

One more question about market fundamentals. It may be a broad question to end on, but with so much production being cut, is this really the beginning of the end of oil, Dave?

Dave Ernsberger

Yeah, that's a great question to go out on. I'll keep the answer short. Well, we could talk for another half an hour about that question alone. It seems like a lifetime ago, but the discussion around energy transition was in high gear at the start of this year. And one of the key data points around that is, oil has a role to play for the next 30 years in the energy transition as part of the energy mix. We will likely see a surge in renewables supply. We'll see a surge in hydrogen as a component of the energy market. But oil – maybe not at today's rate of consumption, by the way, of give-or-take 100 million b/d – but oil will have a role to play for many, many years to come as part of the energy mix for everybody in the world to be getting adequate and reasonably priced access to energy supply.

Joel Hanley

Great. Thank you, Dave, and thank you for joining us today and thank you to everybody else who's joined us online or maybe via the podcast; this will be going out as part of the Platts Oil Markets podcast in the next week or so. And please do continue to engage with us on methodology. We are listening, and we're very happy to hear your views. Just yesterday, we held our monthly regular methodology explainer session online, where you can hear more about methodologies. And if you visit the Platts Events page of our website, you'll see lots of upcoming events that are coming. We have, for example, on May 7, we have one about recycled plastics. We also have a South Asia market update on May 12. And also on our website, you will continue to find regular features, analysis and indeed podcasts that we will share across social media. So thank you very much for your time. Thank you, Dave. And we look forward to engaging with you soon.

Dave Ernsberger

Thank you.