West Texas Intermediate Midland crude is poised to join the benchmark Brent contract this June. This would be the first time a non-North Sea crude has been added to the benchmark basket. And it will change the oil market forever.
But why is WTI added to the Brent basket in the first place? It’s really simple. There has been more US crude entering Europe since Russia’s invasion of Ukraine. At the same time, the production of the grades that make up the Brent basket has been steadily decreasing, and so has the trade in these grades.
“We’re really basing the world’s largest and most important oil benchmark on a very small group of market activity,” James Gooder, Argus vice president, told Reuters.
The latter cited data from its Refinitiv service showing that output from Brent, Ekofisk, Troll, Forties and Oseberg, the original members of the basket, had fallen to less than 700,000 bpd from around 850,000 bpd at the end of 2020.
At the same time, the amount of WTI crude arriving daily in Europe has increased massively, reaching 1.25 million bpd last month, making it a perfect candidate for the international benchmark basket, according to S&P Global, which is doing the addition.
“WTI Midland is the best candidate for this because it already has a refining slate that is quite similar to most North Sea grades,” S&P Global’s director of crude oil and fuel oil markets told Reuters. Related: Large crude inventory drawdown jolts oil prices
It’s more than that, though. According to some analysts, WTI will not just become another member of the Brent crude oil basket. It will come to dominate it, and this means that US political, economic and industry developments would have a much greater effect on Brent crude prices than before.
“The bottom line for Brent is that it will be much more influenced by US fundamentals, such as releases from the strategic oil reserve and Permian production,” Rebecca Babin, senior energy trader at IBC Private Wealth, told Reuters US.
Permian oil production will be particularly relevant when WTI is added to the Brent crude basket. That’s because “The vast majority of US crude oil exports come from Texas ports, and most of the crude shipped comes from the Permian Basin, which has been the engine of US oil production growth ” according to Aaron Brady, Vice President of Energy Oil. market services at S&P Global, who spoke to the Houston Chronicle.
Some industry watchers have pointed to uncertainty about the outlook for production growth from the shale patch, which currently provides the bulk of U.S. oil production. According to one of them, Saxo Bank’s head of commodities, Ole Hansen, the addition of WTI to the Brent crude basket will not have a big impact on prices.
However, despite this uncertainty, shale production continues to grow, albeit more slowly and modestly than during the peak boom years.
“The Permian Basin still has thousands of premium well locations remaining and is expected to continue to grow this decade,” S&P Global’s Brady told the Chronicle.
So adding West Texas Intermediate to the Brent crude basket may seem like an eccentric move, but it actually makes a lot of sense. US oil is being sold to Europe in ever-increasing volumes, while output from former members of the Brent crude basket is falling. Middle East oil has its own benchmark and OPEC has its own basket. It seems the addition was only a matter of time.
With the addition of WTI to the basket, the price of Brent can fall: the price of dated Brent is based on the price of the cheapest note in the basket, and WTI has always traded at a discount to Brent . And that’s good news for consumers.
By Tom Kool for Oilpice.com
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