Introduction
Our price forecast includes a full price set for crude and products in NWE, the Med, USGC, Singapore and the Middle East. The starting point of the pricing system both for crude and products is NWE.
Step 1:
Based on our in-house S&D model, and proprietary data of global flows as well as our understanding of regional and global fundamentals incorporating macroeconomic outlook, geopolitical considerations and market structure, we set our monthly North Sea Dated prices.
Key elements for North Sea Dated (NSD) pricing:
Crude balance: our view on crude demand (via crude runs/end-user demand + crude burn, refining capacity changes (maintenance/additions/closures), refining margins
OPEC(+) policy: (seek advice from OPEC experts on e.g. likely Call on OPEC + state of stocks + market share/US shale outlook (communications, expert understanding)
Crude vs product inventory situation
Market structure (M1/M3): indications of strong/weak relative buying
Speculative support (check CFTC for prevailing long/short bets on oil)
Step 2:
The most important step in setting crude prices and differentials in other regions is a global system based on Gross Product Worth (GPW) calculations. The model, where the initial input are crude assays, produces product yields for any crude, representing a degree of conversion of residues into clean products.
Apart from NSD, we forecast 6 other initial “key regional crude benchmarks”, such as WTI, Mars, Qua Ibo by adding the GPW differential between these grades and the Brent GPW. Some fixed adjustments by the analysts are made:
To fit the model into historical pricing
Fuel cost assumptions in the conversion aspect of GPW
A fixed percentage of GPW differential to accommodate refinery margins and traders
Infrastructure, export capacity, supply and flows
Step 3:
Additional crudes such as Dubai, Girassol, Arab grades as of M-2, are forecasted by the same GPW methodology applied to key regional benchmarks. In this step we set the price of global crudes against GPW values of the 7 key benchmarks (NSD + 6 key regions), i.e. Dubai against Oman, Arab Asia against Oman Arab Med against Urals-Med. Some adjustment factors are made to account for miscellaneous factors:
OSPs and the underlying assumed marketing strategies
Product market developments and refining margins
Export capacity (infrastructure, freight supply)
Expected inter-regional changes in the crude balance, whether due to high supply (e.g. US supply boost reflected in WTI) or strong demand (e.g. arbitrage pull from Asia)