BP has backed a move by Shell to head off a liquidity crunch in the Brent crude market where falling output and oilfield outages can boost global prices, raising questions about its credibility as a worldwide benchmark.
BP Plc , a big trader in the North Sea Brent oil market, said on Monday it leant its weight to the change of trading terms by Royal Dutch Shell , making their wider adoption more likely.
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Traders said Shell's change would encourage players to deliver the full range of crudes eligible under forward contracts for the BFOE grade umbrella by allowing them to adjust prices to reflect the differing quality.
"BP has agreed with Shell to trade on the amended Brent contract terms proposed by Shell as we believe these changes will improve the effectiveness of the Brent contract as an international price benchmark," a BP spokesman said.
Shell said on Friday it will apply a Quality Premium to BFOE forward contracts - deals in Brent, Forties Oseberg and Ekofisk crudes - to trades with its counterparties, effective Monday and for cargoes loading in May and thereafter.
The cheapest of the four BFOE crudes - usually Forties - sets the volue of dated Brent, used as the benchmark for physical crude oil trades around the world. Shell's changes do not apply to dated Brent.
Brent oil futures, increasingly seen as "the" global oil price, fell on Monday and were trading just below $18 a barrel.
BP's support is a boost for the changes which Shell, the custodian of the terms which govern BFOE trading known as the SUKO 90 contract, is introducing for deals with its own counterparties.
Other oil companies' reaction ranged from cautious support to opposition, while yet others were still discussing the changes internally or planning to talk to oil price reporting agency Platts and Shell before taking a view.
"If it's imposed we won't trade on these terms," said a source with another oil company that trades North Sea crude, who declined to be identified. "It can be improved a lot."
Platts, a unit of McGraw-Hill ��which sets the generally accepted dated Brent price, said on Friday it would disregard the new BFOE terms until it had had time to consult more widely with market participants.
"The clause seems reasonable but I think there is still some market discussion on whether it will become accepted," said another North Sea trader. "We are happy to trade on the new terms if they become the norm."
Shell said the quality premium mechanism would support the Brent benchmark by allowing for more crude grades and cargoes to be used in establishing the underlying market price. Some participants agreed.
"It provides more BFOE cargoes that are available to back up the contracts," said one. "Liquidity is already quite high."
At the moment, traders say Forties is the one that most often tends to be delivered into the contracts. Forties was last year subject to supply losses that boosted prices due to outages at oilfields including Nexen's Buzzard.
Over the past year, a growing flow of Forties to South Korea - encouraged by a trade pact with the European Union - has become a common feature of the North Sea market and tends to support prices.
Two Forties traders expected Shell's tweaks to BFOE to have no significant impact on flows to Asia.
(Additional reporting by Claire Milhench; Editing by William Hardy)