Sources say that Petronas is expected to drop pricing its Tapis blend to the Brent crude benchmark. As this matter involves the Shadow Banker, we must make a comment.
In a short answer - no, no, no.
The plans to drop Brent based benchmark is foolish. Tapis or even a regional derivative based on Tapis just wont make it. This is because the Brent benchmark is highly established and the spreads between various cracks has both active physical and paper markets.
Malaysia cannot go it alone in the world oil market. It must agree to play by the rules and learn how to trade using the established markets. This is also in line with the Government mission, vision and transformation attempts to make Malaysia into a land of "endless possibilities."
The issue that Petronas faces is very simple - to whom will it sell its Tapis blend? Currently, our major oil export destinations are Australia, India, Thailand and Japan. These traders in these region can engage in sophisticated derivative contracts to hedge our oil price IF AND ONLY IF the Tapis is benchmarked to a liquid market like BFOE.
But it we go and say that we are no longer going to respect BFOE then how are the refiners like Conoco Phillips in Australia going to hedge purchase of Malaysian Tapis blend. Furthermore, will they respect our pricing if there is no strong basis to the price. We cannot arbitrarily say that the price of Tapis blend is US$100 a barrel unless there is a strong basis to that. That is why benchmarking to BFOE is a must. I can go ahead and hedge the FO crack, the Gas Oil crack, the regrading spread and so many other spreads only if the paper contract and the physical contract are tied to the same basis.
I believe Petronas cannot go and act without first consulting with Pemandu. In the meantime, Pemandu can engage McKinsey and get them to back up what the Shadow Banker says. Petronas must realise that unless you want to see your oil domestically then there is no other option whatsoever than playing the game others play.
I hope Kampong Man takes note.