World’s Most Important Oil Price Transformed
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After years of skepticism, criticism and trader furore, the world’s most important oil price is working better than ever thanks to an infusion of crude from west Texas.
Almost exactly a year ago, the U.S. grade WTI Midland was added to the grades that are allowed to determine the price of Dated Brent, a benchmark for physical crude transactions the world over and critical to a web of derivatives. Since then, the measure has seen record trading volumes in both physical and derivative markets and new entrants — eliminating decades-long concerns over shrinking North Sea oil production.
Having plenty of crude to trade is vital for Brent, which is a benchmark for more than two-thirds of the world’s physical crude transactions. Despite continuous efforts to add new grades into the pricing basket, the measure had been facing a steady decline in North Sea production, reducing its reliability. Platts sought to address that with several overhauls, including one that was aborted following trader pushback. Now those concerns are fading into memory.
“The introduction of Midland has been successful as witnessed by decent liquidity and new entrants into the forward and dated market,” said Kurt Chapman, a veteran North Sea trader who used to be the head of crude desk at Mercuria Energy Group Ltd., echoing the views of at least four current market participants.
S&P Global Commodity Insights, better known as Platts, uses bids or offers for the basket of six grades - Brent, Forties, Oseberg, Ekofisk, Troll and WTI Midland - in its Market-On-Close price assessment process to determine the value of Dated Brent benchmark.
Since the inclusion of WTI Midland in May last year, 214 cargoes with combined volume of 149.8 million barrels of physical crude in the Brent complex have traded in the MOC window, with 138 of them being WTI Midland, according to Platts data. This compares with 87 cargoes in the previous one-year period. Trading in related derivatives has also jumped.
The volume and liquidity seen in the MOC are proof that the market has accepted WTI Midland’s addition to the Brent complex, according to Joel Hanley, Global Director of crude & fuel oil markets at Platts.
Brent’s growing liquidity has also coincided with a period of bumper volumes in other benchmarks too. The Middle Eastern Dubai benchmark, which is a heavier more sulfurous type of oil than Brent, has seen trading surge at times over the last 12 months.
The increased liquidity of physical grades underpinning Brent has attracted new participants from all over the world.
Koch Industries Inc.,absent for much of the past decade, returned to North Sea market just a few days after the U.S. grade was added. Since then, some new and unusual companies participated in trading of Brent complex. That’s included units of Saudi Aramco, Mitsui & Co. Ltd., Macquarie Group Ltd, Repsol SA, Azerbaijan’s state-run Socar and, more recently, India’s refining giant Reliance Industries Ltd.
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“The biggest criticism Platts faced in the past was either their price was too high or too low, as it was often decided by a handful of traders,” said Adi Imsirovic, director of consultant Surrey Clean Energy and a veteran trader. “By having a wider pool of participants, including big refiners such as Reliance, Platts is basically democratizing the benchmark, making it function more properly."
There are still, however, some issues hindering the new benchmark, said Chapman. Those include problems such as timing of delivery window, inconsistency in quality, distortions in freight adjustment, or poor enforcement of terminal compliance in the U.S. Gulf.
But work has been done by oil companies to resolve issues on quality and quantity, said Chapman.
“The industry wants it to work,” he said.
