Will WTI Midland’s inclusion in dated Brent affect oil markets?

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By Arathy Somasekhar and Alex Lawler

HOUSTON/LONDON (Reuters) – Oil-index publisher Platts, part of S&P Global Commodity Insights, will add U.S. WTI Midland crude oil transactions into the Platts dated Brent price assessment from June 2023 cargo deliveries, marking the first inclusion of a non-North Sea crude oil into the Brent basket.

Here is a Q&A about the reasons for the move and its implications:

WHY IS PLATTS MAKING THE CHANGE?

Brent is considered the world’s most important oil benchmark, but supplies of the North Sea crudes underpinning the contract are falling. 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.

As production falls, the number of market participants, bids and offers have been declining.

“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.

DOES THE INDUSTRY SUPPORT THE MOVE?

Platts says the inclusion, first proposed in December 2020, comes after extensive research and talks with market participants.

But it is not without controversy, and the original designer of dated Brent, Jorge Montepeque, sees it as a challenging concept in need of further refinement.

“It appears to be an ocean too far to be comingled,” Montepeque said.

WHY DOES IT MATTER?

As a benchmark used for physical and futures prices for oil and gas markets around the world, Brent is also seen as a bellwether for the health of the overall oil market and, more broadly, the global economy.

Some liquefied natural gas prices are also pegged to Brent. Changes to dated Brent can impact their prices and impact the arbitrage among different grades, and the economics of shipping.

For example, a wider spread between U.S. West Texas Intermediate (WTI) crude and Brent crude’s prices makes crude linked to WTI more economic for foreign buyers.

WHY WAS WTI MIDLAND CHOSEN?

WTI Midland is a light sweet crude oil with characteristics similar to crudes in the Brent basket. It also has a high number of trades, with volumes flowing to Europe spiking to more than 800,000 barrels per day following Russia’s invasion of Ukraine.

“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.

S&P Global considered adding Johan Sverdrup, now the largest North Sea crude stream, to the benchmark, but opted instead for WTI. Sverdrup is a heavier and higher-sulfur grade than those in the existing Brent basket.

HOW WILL WTI MIDLAND AFFECT THE INDEX?

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. In that way, its price would appear as another North Sea grade.

Thomson Reuters competes with Platts in providing news and data about the oil market.

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