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Jude Clemente

Jude Clemente

Jude Clemente is Principal at JTC Energy Research Associates, LLC. He holds a B.A. in International Relations from Penn State University, with a minor in…

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Is WTI Overtaking Brent As The Biggest Global Benchmark?

Permian rig

Brent and West Texas Intermediate (WTI) are the two most important crude benchmarks in the world, oil grades that serve as a reference price for buyers and sellers. Generally, Brent is the crude from the North Sea and seen as the true international benchmark, while WTI is the grade for the historically more isolated U.S.

But, the great American shale revolution continues to transform how oil gets traded around the world, and WTI crude futures are now outpacing contracts for London-based Brent. More U.S. crude oil production and exports have linked the U.S. to the international market. This is a historic opportunity: oil is the world’s most traded commodity, where nearly 70 percent of global demand is internationally traded.

Today’s U.S. oil industry is at heights not seen since the early 1970s, when the country produced nearly a quarter of the world’s supply. Since 2008, U.S. crude oil production has doubled to over 10 million b/d. North Sea production, meanwhile, has steadily fallen about 70 percent since its peak in 1999, to around 1.5 million b/d today. And thanks mostly to key law changes in 2015, U.S. crude exports have surged from almost nothing to averaging 1.1 million b/d last year.

The U.S. oil boom has restarted the competition between two of the world’s largest exchange operators, NYMEX and ICE. NYMEX is where WTI futures contracts get traded, and although headquartered in Atlanta, ICE retains European contracts and took on the Brent futures contract in 2001.

The surge of supply has made WTI more useful to global traders and shippers. In 2017, trading volumes of WTI futures surpassed those of Brent by the largest margin in at least seven years. About 310 million U.S. crude futures contracts — worth $16 trillion — was traded on NYMEX, or nearly 30 percent more than contracts in ICE’s Brent crude futures. Related: The U.S. Oil Boom Is Attracting Canadian Drillers

With more U.S. production and exports, foreign companies that are buying increasing amounts of U.S. oil are offsetting their exposure by trading in U.S. financial markets. This has injected a lot more liquidity and helped U.S. shale producers lock-in more profits on their own production.

When oil prices soared towards $60 a barrel this fall, U.S. producers hedged more future output during the quarter than in at least three years. This should help ensure record crude production that exceeds 10 million b/d this year, with the potential to surpass 11 million b/d next year.

(Click to enlarge)

Looking forward, the growing role that WTI is playing as U.S. shale oilers become the marginal suppliers means that the global market could adopt WTI pricing into trading. One main problem is that WTI contracts are rigidly locked to oil deliverable at the landlocked storage hub in Cushing, Oklahoma. For broader WTI adoption, this may need to change, with WTI better reflecting the price at export hubs such as Houston. To illustrate the changing dynamics, in just three years the Permian basin in west Texas has extended its share of U.S. crude oil production from 20 percent to 30 percent. Related: Will Rising Crude Inventories End The Rally?

As for NYMEX and WTI competition, the Middle East and Asia have been unable to establish an oil futures benchmark because financial commodity trading in these regions isn’t substantial, especially limited by the dominance of state-owned energy companies that curtail competition.

Now accounting for nearly half of all new demand and also being the largest importer, China seeks an expanded role. After numerous delays, oil futures trading should launch at Shanghai’s INE exchange in late March, with the stated goal of becoming the Asian benchmark. This would be the first contract priced in Chinese currency, known as the renminbi or yuan, and uniquely allow foreign traders to invest since the exchange is registered in Shanghai’s free trade zone.

By Jude Clemente for Oilprice.com

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