Global crude oil markets are undergoing a profound transformation. But it is mostly out of sight, out of mind for all but the most involved players in the physical markets. On the surface, it’s a simple change to the dated Brent delivery mechanism: from May 2023, Midland-spec WTI cargoes (we’ll shorten this to “Midland” for clarity and simplicity) could be offered to the complex Brent. to deliver the following month. This change has been in the works for years. Production of North Sea crudes that were until now the exclusive members of the Brent club has been in decline for decades. Allowing the delivery of Midland crude to Brent aims to increase the liquidity of the physical Brent market, thus preserving Brent’s status as the world’s pre-eminent crude marker, serving as the price base for two-thirds or more of physical crude traded in the world. market So far, the new trading and delivery process has worked well. Maybe too well. Over the past two months, Midland delivered has priced Brent around 85% of the time. The number of cargoes moving into the Brent delivery ‘chain’ process has skyrocketed, and the majority of these cargoes are Midland. Is this just an initial surge of players trying their hand at a new market, or does it mean the benchmark Brent price becomes nothing more than commodity-adjusted Midland? In today’s RBN blog, we’ll explore this question and what it may mean for global and domestic crude oil markets.
Before we get into the weeds, which we will have to since we’re talking about Brent, let’s first touch on some high points of what’s happened over the past couple of months. Midland offers have dominated the pricing mechanism for dated Brent, setting the price 95% of the time in May and 75% in June. North Sea crudes, which for decades have marked the price of 100% of Brent, have been relegated to just 5% and 25%, respectively, in May and June. Similarly, most of the cargoes that have entered the Brent Forward Placement market (“the chains”, ie the process of converting a futures agreement into a physical cargo) have also been Midland, almost guaranteeing that any buyer of “Brent” these days will be receiving barrels of Midland crude. Before the Midland-to-Brent era, 7-10 cargoes per month were delivered to the forward lay chain. Since May, this monthly figure has doubled. Even for a market that has been preparing for this event for years, it’s a big deal.
