A Look at the New Brent Crude Oil Benchmark: An Essential Guide for Traders
The Brent Crude oil benchmark, the global price mechanism for crude oil prices, received its first adjustment in decades after Platts—the S&P Global agency that calculates prices for Brent—introduced oil from Texas into its price calculation.
Starting with June deliveries, West Texas Intermediate (WIT) Midland crude oil will be included in the set of oil that Platts uses to price the global benchmark. It is the first time that the benchmark will include oil from outside of the North Sea.
The global benchmark’s credibility has been called into question recently as the North Sea’s oil production has slowly but surely withered away, reducing volumes that change hands at European terminals between Scotland and Norway. In February, total North Sea oil production stood at 726 thousand barrels per day, down from 2.6 million barrels per day at the start of the millennium.
Image Source: nstauthority.co.uk
If that trend continued without correction, it would potentially make prices susceptible to manipulation and a loss of faith across the markets for governments, customers, and investors who use the benchmark to set prices for underlying products and other economic means.
Platts made the last change to the benchmark in 2002, when it added oil from three Norwegian and one British field to its price mix to boost volumes and increase price discovery. While that move helped the benchmark, production volumes across the North Sea continued to fall.
Oil from major producers like Russia and Gulf producers was considered to fix the problem but concerns about political influence made that a less-than-ideal fix. Instead, Platts saw U.S. oil drilled at Midland, Texas, as the best addition, with its sweet crude oil like what is produced in the North Sea.
Still, Platts needs to account for the cost of moving that oil nearly halfway around the world into its calculations. This makes U.S. oil, which hit global markets in 2015 amid the shale boom, even more influential in the world economy. Today, the United States is among the biggest oil exports in the world.
Image Source: eia.gov
About 70% of oil traded around the world references the Brent crude oil benchmark, which makes it enormously important for the global economy. For retail traders, not much has changed, but the proper functioning of the benchmark does mean that the futures and the spot market will remain healthy while the physical market will continue to help market participants hedge their risk and exposure.
While U.S. oil production is expected to slowly decline over the next decade, including Midland in the Brent pricing mechanism may increase U.S. exports by thousands of barrels per day. Energy infrastructure companies like Kinder Morgan or Enbridge may benefit from the change on a long-term basis. For now, the Brent crude oil benchmark lives on as the global pricing standard in the meantime.
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