The price of Brent is about to change its structure, and in a radical way
West Texas Intermediate Midland crude is about to be added to the Brent benchmark contract price next June. This is the first time that non-North Sea crude has been added to the baseline basket. And it will change the oil market forever. So in the Brent price there will be a slice of the WTI price.
But first of all, why is WTI being added to the Brent basket? It's very simple. After Russia's invasion of Ukraine, US crude entered Europe to a greater extent. At the same time, production of the types of oil that make up the Brent basket has declined steadily, and so has trade in these types of oil. “We are really basing the world's largest and most important oil benchmark on a very small pool of market activity,” James Gooder, a vice president at Argus, told Reuters.
The latter cites data from its Refinitiv service which shows that production of Brent, Ekofisk, Troll, Forties and Oseberg – the original members of the basket – has fallen to less than 700,000 bpd from around 850,000 bpd at the end of 2020. of the North produces less and less oil, so its price is less indicative.
At the same time, the amount of WTI crude arriving in Europe each day 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 because it already has a refining plan quite similar to that of most North Sea grades,” S&P Global's director for crude and fuel oil markets told Reuters.
Related: A large reduction in crude inventories shakes oil prices
But there's more. According to some analysts, WTI will not become just another member of the Brent basket. It will come to dominate it and that means that US political, economic and industrial developments will have a much greater effect on Brent prices than in the past.
“The crux for Brent is that it will be much more influenced by US fundamentals, such as the release of the Strategic Petroleum Reserve and Permian production,” Rebecca Babin, senior energy trader at IBC Private Wealth US, told Reuters.
Permian oil production will be especially important as WTI is added to the Brent basket. That's because "the vast majority of U.S. crude exports come from Texas ports and most of the crude shipped comes from the Permian Basin, which has been the growth engine of U.S. oil production," according to Aaron Brady, vice president of the energy market services at S&P Global, who spoke to the Houston Chronicle.
Some industry observers have pointed to uncertainty over the growth prospects of shale patch production, which currently supplies the majority of US oil production. According to one of them, Ole Hansen, head of commodities at Saxo Bank, adding WTI to the Brent basket won't have a big impact on prices.
Yet despite this uncertainty, shale production continues to grow, albeit more slowly and modestly than in the boom years. “The Permian Basin still has thousands of higher quality wells and is expected to continue to grow throughout this decade,” S&P Global's Brady told the Chronicle.
Adding West Texas Intermediate to the Brent basket may seem like an eccentric move, but it actually makes perfect sense. US oil is being sold to Europe in ever-increasing volumes, while the production of former Brent basket members is declining. Middle Eastern oil has its own benchmark and OPEC has its own basket. It seems that the addition was only a matter of time.
WTI is traditionally priced slightly lower than Brent, so its inclusion in the price setting could lead to a downward correction. At the same time, this change is a further sign of Europe's marginalization on world markets.
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The article The price of Brent is about to change its structure, and in a radical way it comes from Scenari Economici .
This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/il-prezzo-del-brent-sta-per-cambiare-struttura-e-in-modo-radicale/ on Mon, 01 May 2023 11:00:39 +0000.