How London's "City" Drives the Oil Sector
I spent the afternoon and early evening yesterday in “The City” – London's sprawling financial district.
As I noted last year in “A 'Tale of Two Cities' for Financing – and Profiting – from Oil,” April 8, 2010, London is the real center for global oil project funding these days.
Despite constrictions in bank credit, debt crises, currency fluctuations, and crude denominated in U.S. dollars rather than British pound sterling, more money continues to be raised for oil within a three-mile radius of the Liverpool Street train station… than any other single place on earth.
I am here in London to brief the Windsor Energy Group, the international assembly of energy leaders founded by a charter from the Queen. The subject is oil market volatility, but the give and take will certainly expand beyond that topic.
This week was also the U.K. launch for my book The Vega Factor, and that has meant interviews and TV appearances.
I've seen one very interesting difference between London and the U.S., when it comes to substantive discussions about oil.
Unlike in the States, financial and economic commentators over here have little interest in putting forward easy solutions to complicated problems. Here, the questions are better, more nuanced, and much more informed.
As a case in point, I may have had the best on-set interview ever yesterday morning…
I did Squawk Box on CNBC Europe from London's fabled Fleet Street.
The studios may be in the middle of where this town's tabloid press stirs up its own brand of controversy, but the questions were – as they say here – spot on, the anchors knowledgeable, and the conversation lively.
Perhaps it is because the ongoing European financial quagmire gives nobody in “The City” much leave to be flippant. Or perhaps it is because the British financial community has operated for some time under siege.
When it comes to oil, there has been another development over the past 11 months elevating the importance of London's City over New York's Wall Street.
We've talked about it a lot, in fact.
The widening spread of the Brent oil benchmark (London's s
tandard) against West Texas Intermediate (WTI, the benchmark traded on the NYMEX in New York) has moved the global oil fulcrum from one coast of the Atlantic… to the other.
Brent now tells us more about what the world's oil sector is doing than does WTI.
Both benchmarks are actually less sour (containing less sulfur) than some 85% of what is traded internationally each day. Yet, despite it being a slightly inferior grade to WTI, Brent has become the choice in more regions as the standard against which actual consignments are priced at discount.
The sour crude dominating the world trade controls market pricing. It was only a matter of time, therefore, until that simple fact would result in a different way of benchmarking oil.
It has resulted in the rise of a new standard, the Argus Sour Crude Index (ASCI) benchmark, as a more correct reflection of the actual oil traded. (See “The New Oil Index is About to Create Even More Opportunity for Investors,” January 12, 2010.)
Of course, it takes time for a new standard to take hold.
However, once Saudi Arabia announced it would switch its benchmark from WTI to ASCI, followed in quick succession by other OPEC members doing the same thing, it became clear that wherever in the world the new benchmark is calculated, applied, and adjusted will have a significant impact on the oil sector.
That location is London.
Looking over the audience yesterday at my briefing – and examining the sidebar conversations during the informal gatherings that always take place after such affairs – I realized these are the faces of the next power brokers in oil.
Some produce it, some consume it, some finance it… But all operate in the center that is progressively dictating what all that means. It is a center located in London, not New York.
As I write this early in the morning, my thoughts are racing ahead to the next interview in about seven hours. This one is with an impressive young (aren't they all these days?) reporter from the Financial Times.
…it is time to go home.