NEW YORK (TheStreet) -- A new sour oil contract is being introduced Monday on the Nymex (the oil-exchange part of the Chicago Mercantile Exchange(CME Quote)).
At the same time, a similar contract is being introduced on the IntercontinentalExchange(ICE Quote). While new oil contracts are hardly rare, this one may represent the beginning of the end for benchmark oil pricing for U.S. exchanges using the U.S. dollar. Let me explain why.
In October, Saudi Arabia announced it was abandoning pricing its sales based on the West Texas Intermediate contract, the one traded at Nymex and the one the Saudis have used as their benchmark since 1993.
For the Saudis, the unreliable nature of WTI trading, with its $147 high price in 2008 and $32 dollar low in 2009, has made them very nervous about continuing to value their only major resource using this increasingly volatile benchmark.
That was particularly the case this year when crude became embroiled in complete asset-class deleveraging and hit its low of $32; the cash price of the Saudi sour crude grades did not follow, reaching $10 to $12 premiums to the Sweet WTI grade. Under normal circumstances, sour crude grades will always sell at a healthy $3 to $5 dollar discount. Pricing of Saudi imports tied to WTI benchmarks during that time cost the Saudis an enormous amount of revenue.
Therefore, Saudi merchants decided as of Jan. 1 to rely upon a cash market index to price their product for export.
