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* BP becomes pioneer of West African crude derivatives
* Oil major clashes with arch-rival Vitol
* Development makes crude more expensive for refiners
By Dmitry Zhdannikov, Julia Payne and Amanda Cooper
LONDON, Sept 14 (Reuters) - Oil major BP has clashedwith rival Vitol in the once-languid West African crude market,buying up cargoes and taking a big derivative position that mayhave raised costs for European refiners.
The West African crude market typically sees cargoes ofNigerian and Angolan change hands in back-to-back deals outsidethe Platts window, a system widely used by the industry to pricecrude. Pricing agency S&P Global Platts sets key oil benchmarksfor the market.
New trading opportunities arose from August, when brokerSunrise started the first derivative for Nigeria's four largestcrude oil grades - Bonny Light, Forcados, Qua Iboe and Bonga -mirroring derivatives trading in the North Sea.
The derivatives, known as contracts for differences (CFDs),allow traders to bet on whether premiums of the four Nigeriangrades versus the Brent benchmark will rise or fall.
The CFDs, also known as swaps, can be used to hedge againstprice fluctuations during the voyage of a physical cargo to aconsumer, which can take weeks. But CFDs can also be used totake a speculative position.
According to five traders familiar with the developments,who asked not to be named because they are not allowed to speakto the media, BP quietly built a long position of up to 10million barrels in the African CFDs contracts in August, bettingthe premium of the grades to Brent will rise in September.
Against BP in the paper market were six trading desks,including trading giant Vitol, which took the opposite side ofthe bet and went short CFDs, betting that African grades'premiums to Brent would fall, according to trading sources.
The paper deals were done on a back-to-back basis with onlyBP, Vitol and five other companies aware of the developments.
BP said it does not comment on trading positions. "However,BP welcomes the introduction of the new West African swap toprovide greater transparency and aid price discovery in the WestAfrican crude market," it said on Friday.
CLASH WITH VITOL
The trades took place in what has long been a regulatorygrey area. London's Financial Conduct Authority, which does notregulate London trading in the West African crude market, butdoes oversee the UK Brent crude benchmark, declined to comment.
BP does not produce oil in Nigeria and has not been a largetrader of Nigerian oil in recent years, although it has boughtsome cargoes for its refining system.
After quietly building its paper position in August, BPlaunched a flurry of bids on the Platts system in September forphysical cargoes of Nigerian oil.
BP bid for a total of 22 Nigerian cargoes loading betweenSept 3-12, a previously unseen volume in the West African crudemarket, where a whole month can sometimes go without a singlepublic bid or offer in the Platts window.
BP's bidding activity ushered premiums of the African gradesagainst the Brent benchmark to as high as $1.70 per barrelcompared to a premium of $1.20 a barrel in August, when BP wasbuilding its CFDs position.
A difference of 50 cents per barrel would in theory bring aprofit of $5 million on a 10-million-barrel CFD position.
The rise in premiums in the physical market made BP a bigwinner on its long position on the CFDs trade, while Vitol was aloser, according to traders.
In reaction, Vitol spent over $500 million to buy sevencargoes outside the Platts system from oil majors Totaland Shell, paying premiums above $1.70 perbarrel, according to three traders familiar with thedevelopments.
The trading house then re-sold the cargoes on the Plattssystem to BP at premiums ranging between $1.55-$1.75 per barrel,effectively accepting a loss on the physical trade but limitingits losses on the CFD side.
"Tensions were running huge between BP and Vitol. It was ahigh stakes game," said a trader familiar with the development.
Vitol declined to comment on the story.
S&P Global Platts said it always ensures bids and offers arefirm, performable and tradeable and that its price assessmentsare reflective of market value.
"We have seen a marked increase in the past several weeks oftransparent information in the West African crude market," saidJonty Rushforth, senior director at S&P Global Platts.
"Alongside the increase in physical information we have seena growing derivatives market," he added. "As the importance ofthat market globally has grown, we have seen the broader marketembrace risk management tools related to it."
Market participants said the main losers from thedevelopments in the West African market will be refiners.
Nigerian state oil firm NNPC sets its monthly officialselling prices (OSP) to long-term crude buyers, mainly refiners,retroactively and based on prices in the Platts system.
"This is very bad from a refiners' perspective. Every selleris now asking high prices and when they show a cargo, all theysay is: "If you don't buy, we'll just sell to BP," said a sourcewith a European refiner.(Writing by Dmitry Zhdannikov; Editing by Jan Harvey)
