Brent: Episode 3 - John Kingston

Neil: Hello and welcome to The Price of Everything, a podcast that aims to shine a light on pricing. The cost of commodities, that's energy, food, and so on is such an important part of our lives, but how are those prices actually calculated? Why do they move up and down quite so much, and what's next? The Price of Everything is the first podcast dedicated purely to how pricing works. My name is Neil Bradford and I'm the founder and CEO of General Index, which is the world's first technology-led benchmark provider. Together with my colleagues from around the world and some special guests, we'll be taking you through how some of the world's most important commodities come to be priced and what the future looks like for them in the age of climate change and the energy transition. Dated Brent is the world's most widely recognised price for crude oil. But why Brent? How did an oilfield off the coast of Scotland become so pivotal in global oil pricing? My colleague, David Ellwood, explores the history. David: John Kingston is currently editor-at-large with trucking data specialist Freight Waves. For our story on Brent, he has a big claim to fame. Back in the '80s, he was a commodities market reporter. He joined the Price Reporting Agency, Platts, New York Bureau in June 1985 as a domestic crude reporter. Little did he know at the time, his remit would soon go into national and he would launch the first Dated Brent assessment. Neil and I spoke to John about those early years. Here he is, beginning by telling us how he first learned the ropes on US crude. John: So in the beginning I was charged with doing three assessments a day: West Texas Intermediate, West Texas, Sour at Midland and Alaska North Slope and the Gulf Coast. Back then A&S production, Alaska production, was close to 2 million barrels a day, and the West Coast could not absorb all of it, so they used to move some of it around to the Panama Canal and then up into the Gulf Coast. That was actually a fairly active market, fairly contentious. There was a gentleman, I won't give you his name just because he doesn't need to be told, who was doing international crude out of New York. An interesting story, his father was an energy entrepreneur and he bought the Come By Chance Refinery in Newfoundland. Really, once he did that, it was an obvious conflict of interest to have his son doing international crude assessments while his father was buying crudes and running a refinery. So he left. He actually had a very successful career as a broker, I believe. I took over the international crude. Now I can still remember from when I started this beaten up, ragged piece of paper that had our contacts on it, and there probably wasn't more than 10. It also had in very large letters, capital letters, "We only assessed 15-day Brent" 15-Day Brent is what they call Paper Brent back then. It was, of course, the 15 days because that was the notice that you would get of your loading dates for the cargo. I would be on the phone all day... Because remember, there was no ice contract. I mean, if there was a predecessor to the... Of course ICE was preceded by IPE. I don't know if IPE might have been trading Brent, but it didn't have a liquidity, nobody really looked at it. So if you want to know what the 15-day Brent Price was, you really had to call around and find out what deals were getting done. I would just write down deals all day. So this would've been 1986 when my predecessor left, I would've took over international. Yes, I had that ragged piece of paper with the admonition that we only do 15-Day Brent and not dated. I really don't know why. I think maybe back then the Dated Brent Market, the physical Brent market, was not particularly liquid and not particularly transparent. But it came pretty obvious to me pretty quickly that we really needed to change this. The first Dated Brent assessment came out, I believe around April 1987. Neil: So this oilfield came about, I think it was discovered in 1971. I think the first production was about 1976. So what purpose was this price? You talked about a traded market. But just talk us through a little bit who was buying and selling and what was a 15-day price used for and then a dated price? John: The reason it was used was really when you looked around the world prior to that, they were all published prices and they didn't change much and they didn't move. Now let's remember that in October, I think it was October of 1983, the NIMEX launched this WTI contract, which was immediately successful. So you had a marker, a crude price that could move every single day, minute by minute. But once that happened, Brent wasn't going to sit there, and Brent wasn't controlled by any single entity. I mean, obviously the big equity stakes were held primarily at that point, I think, by BP and Shell. But I think, really, all the major oil producers had it. It was not sold with any movement restrictions so you could take a cargo and you could take it anywhere you like. So brokers got in, there were brokers that we talked to all the time who would give us the deals that were getting done, traders piled in as well. Of course, you had the equity players as well. So given that there was nothing out the Middle East, except Dubai crude, that really traded freely. So given the location of Brent, the fact that that crude could go anywhere into Europe, into Africa, into the Middle East, though I think it pretty much stayed in Europe, given that, it was a very logical benchmark to develop. It's not like it really muscled anything out. Because of the static nature of the market with these whole posted prices that didn't move, as a result of that, the market was looking for something like that. West Texas Intermediate could have been it, but of course it had export restrictions, which had then had for another 40 years. So it was a strictly US price. So it was very transparent, but it had some limitations as a benchmark. Neil: So this is an international price. It's a market, as you say, I mean the oil could go anywhere. It's seaborne, so you're not tied to a pipeline structure or anything like that. You've got that flexibility. I guess I've heard also that a key element of that is that the UK rule of law and the UK legal system is trusted. Therefore, contracts written in the UK were viewed as pretty solid. Therefore, for the first time you had an international crude market rather than, as you say, either a posted market where sellers just set the price and you take it or leave it, or obviously there was a pretty robust US traded market, but that was very much tied just to the US system. Is that a fair summary, would you say? John: Yeah, I think you're right. Remember, I mean, the industry did come up with the standard 15-day contract, which set the legal basis for trading in that. That allowed it to take off because, I mean, everybody signed onto that, everybody used it. So it really set some standards that allowed the trade to grow. Neil: Then talk us through 15 day versus dated and how did that evolve and why was that important for this to really flourish? John: Right. Well, back then the 15-day contract, which is not the way it's worked. Today, and don't ask me how it works today because I don't know, you've got David there to tell us. Back then, a 15-day contract only meant that you would get notification of your loading dates of the cargo you owned 15 days before it loaded. Now, mind you, those dates were actually sometimes transmitted by telex. Even though telex, by 1985, for most of the world, was still an antiquated technology in far flung parts of the world like Africa, that was still the means of communication. So you would get a telex notification at 5:00 UK time that your cargo that you own is going to be loading on June 13th to 15th, in that window and come pick it up. Of course, once the dates were applied to that, then it became a dated Brent cargo because it had a date on which the physical oil could be loaded. A cargo in a 15-day market could get traded dozens and dozens of times and often did. These chains were enormous. It used to drive me crazy because sometimes when the general press would write about it, they would talk about a cargo that would get traded multiple times as it was crossing the ocean. That really wasn't the case. I mean, once it was loaded, yes, it could be sold again. But they were getting the rapid change in the 15-day market confused with what happened in dated the dated market. I know that there were certainly changes; the 15-day market I think may have become a 21-day market at one point. So I think you got to be pretty old to have traded a 15-day cargo, but that was the standard. Those in the beginning, before the dated Brent assessment, the Platts numbers on Brent were 15-day numbers, which means they were not physical prices. Neil: So as you, John, made that development to dated, did you think you were doing anything particularly special or interesting? John: Oh, that's a good question. I guess I probably did. I will tell you that because the crude... You think of a benchmark provider like Platts or I guess even General Index, and the reality is, back then, I don't think there was a lot of crude benchmarking going on in the physical markets because crude trade was fairly new. Like I said, I will tell you that I did this A&S price, this Alaska North Slope price into the Gulf Coast, and I had one particular trader that would get on the phone and scream at me every single day about my A&S assessment. I would like to tell you that eventually, he did go to jail, so there was a little bit of calm there. He didn't go to jail because he yelled at me, but I certainly took a little bit of delight in it.Anyway, so the idea that we were going to create this great crude benchmark, certainly Platts was very big in the product benchmarks. I remember one day I filled in for the guy who did the New York Harbour fuel oil prices, they're called resid in the US. Back then, they would only move in 25 cent increments and not all that often. About halfway through the day I thought, "Well, you know what? Maybe I need to move this this day." The word got out through the industry like wildfire, "Platts is thinking of moving the resid numbers today!" So you can see where that was really big in products and not as big as in crude. So I don't know that I necessarily thought that starting Dated Brent was going to be such a big deal. If it wasn't me, it would've been somebody else eventually, obviously. But I mean, let me talk a little bit about how I would assess it at that point because it shows the way the market has changed. So the window that we would use were five to 15 days out. So if it was June 3rd and I heard of a deal for June 4th to 6th, that wouldn't be in the assessment, because that was not in the five to 15 days window. Generally, there was not enough trade; you might get one trade or two trades a day, and that really would become the assessment. If a deal 9 to 11 days out got done at Paper Brent minus 10, then that really became the assessment. When I say Paper Brent, of course, I mean 15-day Brent. I do want to point out that at that point there were no swaps. So it really wasn't until the late '90s that the methodology was changed, in which the value of swaps was built into the assessment. After we brought the swaps in, if you had a development where you had a swap value for 13 to 15 days out and a physical deal of five to seven days out, eventually the methodology changed so that it brought in that swap as part of the deal. Back then, if you had one physical deal anywhere in the window, and some days you didn't have any, that pretty much became the assessment because it was not a mature market yet. My recollection is that swaps did not become a thing in the market until around 1989 or 1990 when the CFTC handed down a decision that basically said, "This ain't our issue. We are not regulating swaps. We do not believe that that is in our remit." So at that point, the swaps market took off. But when I was doing Dated Brent, there were no swaps. So it's not like I ignored them, they just literally didn't exist. David: John, it's interesting, that what you're describing is the emergence of the small, green shoots of something that's grown over the last 35 years into this giant oak, to torture a metaphor. I mean, tell us a little bit more about just that process of the engagement with the market participants. You mentioned someone who would shout down the phone to you. What was that interaction like? Did you relish... Who were the types of companies that you were speaking to? I get the sense that they were free and able to discuss with you. Was it an open conversation? John: My background is as a journalist, I took the approach of just, I talked to a lot of people on the phone and then I made my decision. I don't even know if we had a formal announcement that we were going to do this, we just launched it one day. Back then, the crude oil market wire, which was delivered by telex, in fact, this was pre-fax days, the crude oil market wire was the primary vehicle for getting these numbers added on the crude market. They were also in the oil grand price report, but that used to just be delivered by mail, so that wasn't exactly timely. So we probably had an announcement, and I'm sure I spoke to many, many people. Really, quite frankly, my day then was... There was no internet that back then. I'd pick up the phone, "Hi, Bob, how are you doing?" We'd talk, I'd write stuff down. "Hey, thanks a lot. Take care." I press in another number, I call somebody else. I mean, this went on all day long. Quite frankly, I feel sorry for editors today who don't get to do that because I got pretty nice, personal relationships with a lot of people. So I just assuming, my memory's a little vague on this, that at a certain point, I realised in talking enough of them, "Yeah, we're going to do dated." David: So I guess it was through an organic process, you got the sense that this is where the market was going. Was that more the case than a particular company or participants involved in Brent in particular, who wanted to shine a bit more light on it or have an independent, third-party take in this role? John: Yeah, I mean, it's an interesting question, David, because I don't fully remember. But now, memory's starting to come back as we speak about this. I do pretty much recall people saying, "Yeah, you should do dated. You should do dated. The market is developing and you're not there." Back then, before press reporting agencies really became as thoroughly embedded as they are now, I think there was a part on some people's view that, "Well, maybe if we convince them, they won't assess this product," which is ridiculous, of course, in retrospect. Neil: Yes. I think you're talking about absolutely fascinating time where a new market develops based on production discovered in the '70s. The trading comes along in the '80s. There's a particular unique situation, which means that the UK is the right place for cargoes to be sold from. Then this market develops. Reporters like yourself start reporting it, bring that clarity to where the prices really are at. And as you say, we've done a lot from them, but it is amazing that this is still the oilfield we talk about and the number that we're still referring to. Well, you described how people were doing it was important, whether or not this price was produced or covered and how they wanted it to be higher alert, depending on whether they're a buyer or a seller. But just talk a little bit about how you understand that number came to be used. What did the industry do with that number? How did it become what it is today? John: Of course, I think that one of the big uses of any benchmark now is the settlement of derivatives. As I said, when I started, it's the price, there were no derivatives. I mean, if there were, they certainly weren't at the level now. I mean, I guess there had to be some derivatives to have the CFTC rule on whether they were going to regulate them. David: John, I want to come back to you and what your reflections are, now you're 35 plus years from the genesis of Brent, of Dated Brent, and how that evolved. You look more broadly at the proliferation of financial markets and where these benchmarks have been used. How do you look back and reflect on your role in bringing what has become such an integral price to market? John: Yeah. Well, I'm reminded of the joke from Seinfeld where Jerry and George were talking about their favourite explore. George says his favourite explorer was DeSoto. Jerry says, "Why?" And George says, "Well, because he discovered the Mississippi." Jerry says, "What, like they wouldn't have found that anyway?" Look, I'm very proud to have been the first person to do Dated Brent. One funny thing was, if you go into the database now, let's say a guy named Joe Smith puts out the assessment for European diesel in the database, it will say that Joe Smith did that. Back then, we had a product called the spinner where you'd put your data into this tool and you would dump into something called the spinner, and the spinner would just scoop it up and put it into the database. So it puts the origin of the data as spinner. So it disappoints me that my name's not on there because I don't have that proof. But yeah, I mean, I'm proud to have been the first one to do it. When I look back at how simple it was, I won't call it simplistic, how simple it was, compared to the complexity of today's, it's just staggering to me. But that's progress, that's intellectual progress, that's economic progress. I will tell you, I mentioned working for American Metal Market before that, the metals markets are more complex than they were back then. So I mean, all of this, as you had financial deregulation, you had more complexity and more minds brought to it. David: Thanks very much to John for joining us on the podcast. To our listeners, if you'd like to engage with anything he said, you can join in the conversation on Twitter and LinkedIn by using the hashtag, #GXPriceOfEverything. You've been listening to The Price of Everything, a new podcast from General Index. Goodbye.