The long-awaited revamp of the Brent futures contract took place on Thursday. The Brent contract, a construct of Oil-index publisher Platts added U.S. WTI Midland crude oil transactions into the Platts dated Brent price assessment from June 2023 cargo deliveries. This was the first inclusion of a non-North Sea crude oil into the Brent basket. Eyes have now shifted from the North Sea to Texas. With deliveries that arrive Thursday on Midland prices will be included in the global pricing standard, a reflection of how energy markets have been reshaped in Texas and America’s frame.
The move is significant given Brent’s place as an international benchmark that underpins prices for much of the crude and liquefied natural gas that trades globally. At a time when one of the world’s biggest producers, Russia, is at war after attacking Ukraine and sanctioned this is a big shift geopolitically. Whilst this was long muted before the Russian invasion it’s not lost that Putin’s sworn enemy; America is now in the benchmark.
How Brent is Constructed
Platts, now part of S&P Global, calculates Brent based on oil that changes hands at Northern European terminals. The assessment originally focused on the market rate of crude from the Brent oil field between Scotland’s Shetland Islands and Norway. The Brent contract is traded mainly on the Intercontinental Exchange based in London.
The Brent field’s output has been depleting which threatened to make the benchmark less representative of the physical oil market. Platts and ICE have gradually expanded the calculation to include four other grades drilled elsewhere in the North Sea.
The five British and Norwegian North Sea crudes: Forties, Brent, Oseberg, Ekofisk and Troll that currently make up the contract have fallen below 700,000 barrels per day (bpd) versus 850,000 bpd in December 2020, according to Refintiv Eikon data.
“WTI Midland is the best candidate for this because it already has a fairly similar refining slate to most of the North Sea grades,” said Joel Hanley, global director, crude and fuel oil markets, at S&P Global.
WTI Midland is a light sweet crude oil with characteristics similar to existing crudes in the Brent basket. S&P Global to keep the benchmark European considered adding Johan Sverdrup, now the largest North Sea crude stream. However, it was the sweetness of Midland that won over. Sverdrup is a heavier and higher-sulfur grade than those in the existing Brent basket.
“We’re really basing the world’s biggest and most important oil benchmark off a very small pool of market activity,” said James Gooder, a vice president at commodity market intelligence firm Argus, which competes with Platts. “When I started covering this market nearly 20 years ago, we would have dozens of trades every week. And now, if we’re lucky, we have about two trades of all those different crudes,” he said.
What is Platts Dated Brent?
Dated Brent is a critical component of the Brent Complex, which also includes physically delivered crude oil later in the future, in the form of Cash BFOE (Brent-Forties-Oseberg-Ekofisk) and EFPs, as well as financially settled derivatives like Brent Futures, Contracts for Differences (CfDs), Dated-to-Frontlines (DFLs) and a variety of other derivatives.
Platts will include WTI Midland cargoes in the Dated Brent assessment from cargo delivery periods starting June 2023. These physical cargoes can be bid or offered in the Platts Market on Close assessment process for inclusion in Dated Brent from May 2, 2023, with the associated June Cash BFOE value assessed from February, 2023.
Platts described Dated Brent as follows;
Platts Dated Brent is the world’s leading benchmark assessment of the value of physical, light sweet crude oil. The term “Dated Brent” refers to physical cargoes of crude oil in the North Sea that have been assigned specific delivery dates. Analysis of trading activity in the physical spot markets by market reporters at Platts culminates in the publication of the Platts Dated Brent benchmark — our daily assessment of the price of Dated Brent in the North Sea crude marketplace. Dated Brent is used as a benchmark pricing reference for transactions involving crude, refined products, and other commodities. It is also seen as a bellwether for the health of the overall oil market and, furthermore, the global economy.
Dated Brent’s price is set by the cheapest of the grades in the basket, which is usually Forties. S&P Global applies a freight adjustment to allow cargoes traded on both a free-on-board (FOB) and cost, insurance and freight (CIF) to play a role in the dated Brent benchmark. It will extend to WTI Midland.
In effect, the price of WTI Midland, shipped from the U.S. Gulf Coast and delivered to Rotterdam will be calculated by deducting the cost of shipping from the U.S. to Europe and netting back a freight rate as if the crude were shipped to Rotterdam from the North Sea. This allows its price to appear as another North Sea grade.
Dated Brent is moving to a 700,000-barrel cargo size
Platts has received feedback that a significant proportion of the Aframax fleet can now move cargoes of 700,000 barrels, with this becoming the standard in shipments of WTI Midland to Europe, while many cargoes in the 600,000-barrel North Sea markets are short-loading or dealing with contractual issues of overage. Feedback and research show that almost all receiving terminals in Europe can receive 700,000-barrel cargoes. Platts has therefore amended the size of cargoes reflected in Dated Brent and Cash BFOE to 700,000 barrels, with a tolerance of 1% in the buyers’ option.
The Shale Revolution
In effect the response the addition of Midland oil is an acknowledgment of the shift in global oil production and sales. The shale revolution made the U.S., and specifically Texas an energy superpower. Innovations in drilling technology by majors led by Exxon Mobil saw record production and the US in 2015 allowed producers to sell oil to foreign buyers for the first time in 40 years. This led to America becoming an oil export superpower alongside Russia and Saudi Arabia. Russia and Saudi Arabia have, for pricing manipulation purposes at least, joined forces under the cartel OPEC plus.
The U.S. exported about 134,000 barrels of crude a day 10 years ago, according to the Energy Information Administration. Daily exports in the first two months of 2023 averaged 3.7 million barrels, which is roughly the consumption of Japan.
Analysts vary on the future effect of the new benchmark construct. Some believe the addition of cheaper American oil is likely to lower average prices overseas and boost earnings for U.S. exporters. With more oil underpinning Brent, its value should become less vulnerable to squeezes or manipulation.
“Once you become a benchmark, you have influence over all the other grades of crude,” said Adi Imsirovic, director at Surrey Clean Energy and editor of a newly published history of Brent.
The Midland Contract
The Midland futures contract is tied to oil that passes through Houston and Midland, Texas and reflects the Permian Basin. Most exports leave from Houston or Corpus Christi, Texas ports.
Through May 24, 2023, the average number of outstanding futures contracts tied to crude rose nearly 57% over 2022 levels, according to CME Group.
An important recognition is that it is not the more heavily traded West Texas Intermediate benchmark, WTI, that derives from a blend of oil grades traded at the storage hub in Cushing, OK. The rationale is to reflect the modern state of oil production. The Brent calculation will factor in light, sweet crude oil drilled near Midland. This light blend is what refiners desire because it is relatively easy refined into gasoline and diesel.
Source: WSJ, S&P Global
From The TradersCommunity Research Desk