A couple of years ago, British oil and gas supermajor BP Plc (NYS:BP) lamented that the North Sea crude price Dated Brent--the company’s most important pricing benchmark--was experiencing “regular dislocations.”Back then, a handful of deep-pocketed traders would sometimes hold as much as 40% of the world’s total crude supply for particular months, allowing them to manipulate the markets. Luckily for global markets, the inclusion of the United States' WTI Midland into the benchmark has made dated Brent more liquid and less susceptible to manipulations by vastly widening the pool of tradeable cargoes. The total supply of benchmark grades including Brent, Oseberg, Ekofisk, Forties, Troll and now WTI Midland has almost doubled from three years ago.
“Falling supply has been the biggest problem for Brent, so the whole idea of the inclusion of WTI Midland was to increase liquidity and prevent squeeze in the Brent benchmark, ” Adi Imsirovic, director of consultant Surrey Clean Energy and a veteran trader, told Bloomberg.
And, it’s all thanks to the U.S. shale revolution of the past 15 years that has made the country the leading oil producer and also transformed the country into a net exporter of oil. Last May, S&P Global's Platts added U.S. WTI Midland crude from the Texas shale fields to the global Dated Brent benchmark that accounts for roughly 80% of the world's crude. WTI Midland is similar in quality to the North Sea crude used in Dated Brent. To demonstrate its sheer dominance, consider that WTI Midland has set the price of Dated Brent more than half the time since its debut in the benchmark.
The inclusion of WTI Midland into Dated Brent serves another useful purpose: it prevents North Sea producers from putting their own cargoes into so-called chains. Chains, usually the cheapest grades, allow a company with forward contracts to sell actual barrels of oil to another firm, providing a link between paper and physical markets. Since May 2023, WTI Midland has dominated chains, turning the tables on Forties thanks to the U.S. grade being cheaper despite its superior quality.
"The market has really embraced Midland as a deliverable into the Dated Brent contract. Liquidity in the spot market has doubled with more companies involved," Dave Ernsberger, global head of pricing and market insight at S&P Global Platts has told Reuters
Surging U.S. Oil Exports
Judging by ongoing developments, U.S. crude is set to continue dominating global markets for years. According to data from ship tracker Kpler, WTI Midland exports hit a record at 2.94 million bpd in December, good for a 550,000 bpd Y/Y increase. About 1.71 million bpd, or more than half of the December volumes, was sent to Europe. Incidentally, surging U.S. crude exports have come at a time when North Sea output has been on a downward spiral. The supply of the five grades of North Sea crude that are included in Dated Brent fell to about 537,000 bpd in June from about 607,000 bpd a year earlier.
The inclusion of U.S. crude in dated Brent comes with clear benefits for U.S. producers, too, since they can sell WTI Midland many months forward into the Brent market, locking in future revenues and eliminating significant pricing risk. This has helped drive up activity in U.S. crude futures markets. Combined WTI Houston and WTI Midland average daily volumes of futures lots traded as differentials to WTI futures soared to 19,188 in May, nearly triple the figure before WTI Midland joined the benchmark.
"We are certainly seeing that reflected in hedging activity across the WTI complex,’’ said Peter Keavey, global head of energy at the CME.
That said, the short-term U.S. shale oil outlook appears murky. StanChart has reported that the horizontal rig count started to decline sharply in early 2023, and currently sits 20% below its post-pandemic peak after flatlining for the past six months. The analysts point out that whereas the completion of previously drilled wells and technical change provide an offset, a significant fall in activity, more often than not, leads to a lagged decline in growth. The analysts have predicted that U.S. crude output will clock in 300 kb/d lower than the pre-pandemic peak by the end of the year.
The EIA concurs with this view and has predicted that production will continue to fall in the second and third quarters of 2024 before rebounding in 2025.
Luckily for the oil bulls, most experts have predicted that global oil demand will continue to grow in the coming years. OPEC Secretariat has forecast demand growth of 2.247 mb/d in 2024, StanChart at 1.719 mb/d, the EIA’s forecast is 1.43 mb/d while Paris-based International Energy Agency (IEA) currently has the lowest 2024 demand growth forecast at 1.33 mb/d. For 2025, the OPEC Secretariat forecast is 1.847 mb/d; StanChart's at 1.424 mb/d while EIA 2025 demand growth forecast is 1.379 mb/d.
By Alex Kimani for Oilprice.com
