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U.S. Crude Joins Biggest Oil Benchmark
Starting today, U.S. oil will be part of the Brent crude basket that underlies the world’s most traded benchmark contract.
It will be the first non-European grade included in the basket, highlighting the change that the U.S. shale revolution brought about for the global oil market.
“Since the restart of U.S. crude exports in 2015, WTI Midland has become a baseload grade for European refiners and a core part of the North Sea oil market,” Vera Blei, who is in charge of oil market price reporting at S&P Global Platts, said in 2020.At the time, she added that the inclusion of WTI to the Brent basket “would provide additional volume and ensure the continued robustness of Dated Brent for the next decade and beyond.”
Bloomberg reported on the ratings agency’s plans to include U.S. crude in the Brent benchmark three years ago, but these plans understandably lost the spotlight to Covid. But now that the pandemic is not the number-one news everywhere, S&P Global Platts’ plans re-entered the news space and, beginning today, the change is a fact.
Brent used to be made up of five oil grades, produced at five North Sea fields: Brent, Ekofisk, Troll, Forties, and Oseberg. But the combined production of these five fields has fallen to less than 700,000 bpd from some 850,000 bpd in late 2020.
Meanwhile, U.S. crude oil sold abroad has soared by more than 700% in less than ten years. From about half a million barrels daily right after the export ban was lifted at the end of 2015, to date, U.S. crude oil exports have expanded to over 4 million barrels daily.
U.S. crude arriving in Europe specifically has topped 1 million barrels daily, reaching 1.25 million bpd in March. This is unlikely to change anytime soon as the EU, to its own displeasure perhaps, still uses quite a lot of oil and has to get it from somewhere that is not Russia. What better source than the U.S.?
“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 S&P Global’s director for crude and fuel oil markets in April, speaking to Reuters.
It is also the best candidate because its production has been growing strongly in the past decade, unlike the production of Brent, Ekofisk, Troll, Forties, and Oseberg. By including WTI Midland in the Brent basket, S&P Global will make that basket more accurately representative of the physical oil trade situation.The more interesting part, however, is how the addition of WTI Midland would affect prices. Some analysts argue that, because it is cheaper, the addition of the U.S. crude will bring overall Brent prices down with it. Others note that the addition would increase the influence of U.S. events on global oil prices.
“Bottom line for Brent is that it will be much more influenced by U.S. fundamentals such as Strategic Petroleum Reserve releases and Permian production,” Rebecca Babin, senior energy trader at IBC Private Wealth US, told Reuters in April.
“Once you become a benchmark, you have influence over all the other grades of crude,” Surrey Clean Energy director Adi Imsirovic told the Wall Street Journal this week.
This influence will continue, not only because there is now a U.S. crude grade added to the Brent benchmark. It is because U.S. oil production, even at a slower growth rate, will continue to be much stronger than European production.
After all, Britain’s potential future Prime Minister just vowed to ban new oil and gas licensing for the North Sea if his Labour Party wins the next elections. Perhaps in the future, Brent crude will become even more international.
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