After years of contention, the world’s most important oil price is poised to transform for good, allowing crude supplies from West Texas to help determine the price of millions of barrels a day traded in oil
The change is because the existing benchmark, Dated Brent, is slowly running out of tradable oil to remain reliable. As such, its publisher S&P Global Commodity Insights, better known to traders as Platts, has been forced into a dramatic overhaul.
His change was fraught with controversy and caused much stress among physical oil traders. But it was necessary. BP Plc said at one point that Dated Brent was subject to “increasingly regular dislocations”.
But Dated’s future is already set. Based on June loadings, West Texas Intermediate Midland, Permian oil will become one of the few grades to set the dated benchmark.
Here’s a look at what matters as the transition approaches.
1. Why does it matter?
Dating, as it is commonly known to oil traders, helps set the price of about two-thirds of the world’s oil and even defines the price of some gas deals.
Oil-producing states will often sell their barrels at small premiums or discounts to Dated, so they care about the precise mechanics of how it’s formed. In addition, the benchmark is at the center of a complex web of derivatives, which ultimately shape exchange-traded Brent oil futures.
The dating affects a lot of oil prices, so even crude in Dubai could feel the effects, according to Adi Imsirovic, a veteran oil trader and senior researcher at the Institute for Energy Studies Oxford.
2. What exactly is happening?
Traders will be able to offer WTI Midland for sale from the US Gulf Coast. It will be delivered to Rotterdam and then price compensated by a freight adjustment factor as if shipping from the North Sea.
Following a careful process, Platts will assess whether oil is offered at a level above or below the five existing grades set by Date: Brent, Forties, Oseberg, Ekofisk or Troll.
If Platts judges that WTI Midland is the most competitive price offered or actually sold, then it could set Date.
Thus, WTI Midland could influence the price a seller of a barrel in the Atlantic Basin charges a refinery in China.
