New York, 30 August 2011: Reuters

Forties Blend crude, the increasingly variable basis for the price of a huge proportion of globally-traded oil has become even more unpredictable. Oil major BP Plc , the operator of the Forties pipeline, has quietly switched to forecasting Forties output on an "unstabilized" basis, according to North Sea crude traders.

In other words, BP's estimates of Forties output will no longer show a crude oil with a known amount of water and natural gas liquids (NGLs) but rather a mixture that could well include more water and NGLs than refiners actually want.

For any other grade of crude, this change would be of little importance beyond a small subset of the broader oil trading community. But as Forties almost always sets the price of Dated Brent, itself the basis of crude prices throughout Europe and West Africa, the change is significant.

Forties is one of the main constituents of "paper" Brent, the over-the-counter market that underlies Brent crude futures and which guides the "Dated" Brent price that is the benchmark for many crude oil shipments worldwide. Already unpredictable flows of Forties have whipsawed oil markets this summer as operational problems at the Buzzard field slashed the number of Forties cargoes available to refiners.

That in turn distorted the Brent market, which has traded more like a gauge of dwindling North Sea supplies this year than a purported global oil benchmark. The stabilization issue adds uncertainty.

PAPER BRENT

For instance, BP now says Forties output in September will be 568,000 barrels per day on an unstabilized basis compared with its most recent forecast of 530,000 bpd on a stabilized basis, according to two North Sea treaders. BP's Forties pipeline website also carried the same estimates for unstabilized crude blend and confirmed it would only make forecasts on an unstabilized basis from here on.

The difference of 38,000 bpd is equivalent to almost two full cargoes, not a trivial amount given the need for regular trades of Forties to establish a clear market price. But to make matters worse the difference does not remain constant.

For October, BP now forecasts unstabilized Forties output of 573,000 bpd compared with its most recent stabilized forecast of 537,000 bpd for that month - a difference of 36,000 bpd. November shows a bigger swing - a huge 53,000 bpd. The unstabilized forecast is now 588,000 bpd compared with a previously expected (on a stabilized basis) 535,000 bpd.

How much of this swing is due to updated forecasts instead of uncertainty over the amount of water and NGLs that will be included in crude flows is not clear. And, to be fair, BP is essentially a by-stander as the major has to rely on the operators of the individual fields that go into Forties blend for its estimates.

Again there is nothing suspicious here. Forties is systematically important to the global oil market as a price benchmark but there are no legal requirements for field operators to provide timely data on output or quality to the broader market.

The upshot, however, is that participants in the North Sea market now have to factor in increased uncertainty about the availability of oil supplies. Buying on the so-called 21-day paper Brent market already requires a bit of a leap of faith as buyers have no certainty which of the four benchmark North Sea blends (Brent, Forties, Oseberg and Ekofisk) will be delivered.

But as lower quality Forties is generally the only grade delivered against the paper Brent contract, it is fairly easy to be sure of what one will receive. The real problem is that players on the short end of the paper Brent contract have found themselves scrambling for cargoes when Forties output has been lower than expected.

This summer's mess where a number of Forties cargoes were canceled due to problems at the Nexen-operated Buzzard field is illustrative. Uncertainty over availabilities of spot Forties cargoes prompted sent players short the paper Brent market into Brent futures for hedging purposes.

The effect of this hedging was to put a regular bid into the Brent market that was more reflective of very short term trends in North Sea crude production than global oil demand. BP's latest move may well add to this phenomenon. With the gap between forecast unstabilized Forties production and the actual amount of stabilized crude that will be available to the market being variable, there's more uncertainty in the amount of oil available for delivery against the paper Brent contract.

Fortunately for North Sea traders the marketplace is highly sophisticated, offering a wide range of instruments to hedge exposure. But again, the question remains: is this really the optimum basis for pricing the oil for the rest of the world?

Ends --

By Robert Campbell, Reuters market analyst – for Commodities Now.

The views expressed here are his own.