West Texas Intermediate Midland crude is about to be added to the Brent benchmark contract this June. This would be the first time a non-North Sea crude has been added to the benchmark basket. And it will change the oil market forever.
First, however, why is WTI being added to the Brent basket? It's really simple. There has been more U.S. crude oil going into Europe since Russia's invasion of Ukraine. At the same time, the output of the grades making up the Brent basket has been falling consistently, and so has trade in these grades.
"We're really basing the world's biggest and most important oil benchmark off a very small pool of market activity," James Gooder, Argus vice president, told Reuters.
The latter cites data from its Refinitiv service as showing the production of Brent, Ekofisk, Troll, Forties, and Oseberg—the original basket members—had fallen to less than 700,000 bpd from some 850,000 bpd in late 2020.
At the same time, the amount of WTI crude that is arriving in Europe daily has increased massively, hitting 1.25 million bpd last month, making it a perfect candidate for the international benchmark basket, according to S&P Global, which is making the addition.
"WTI Midland is the best candidate for this because it already has a fairly similar refining slate to most of the North Sea grades," S&P Global's director for crude and fuel oil markets told Reuters. Related: Large Crude Inventory Draw Jolts Oil Prices
It is more than that, however. According to some analysts, WTI will not just become another member of the Brent crude basket. It will come to dominate it, and this means that U.S. political, economic, and industry developments would come to have a much bigger effect on Brent crude prices than before.
"Bottom line for Brent is that it will be much more influenced by U.S. fundamentals such as Strategic Petroleum Reserve releases and Permian production," Rebecca Babin, senior energy trader at IBC Private Wealth US, told Reuters.
Permian oil production will be particularly relevant when WTI is added to the Brent crude basket. That's because "The vast majority of U.S. crude exports originate from Texas ports, and most of the crude shipped out originates from the Permian basin, which has been the growth engine for U.S. oil production," according to Aaron Brady, a VP of energy oil market services at S&P Global, who spoke to the Houston Chronicle.
Some industry observers have pointed to uncertainty about the production growth prospects of the shale patch, which currently provides most of U.S. oil output. According to one of them, Saxo Bank's commodity chief Ole Hansen, the addition of WTI to the Brent crude basket will not have much of an impact on prices.
Yet despite this uncertainty, shale production continues to grow, albeit more slowly and modestly than during the peak boom years.
"The Permian Basin still has thousands of premium well locations remaining, and is expected to continue growing this decade," S&P Global's Brady told the Chronicle.
So, the addition of West Texas Intermediate to the Brent crude basket may seem like an eccentric move, but it actually makes perfect sense. The U.S. oil is being sold in Europe in ever-growing volumes while the output of previous Brent crude basket members is falling. Middle Eastern oil has its own benchmark, and OPEC has its own basket. It seems the addition was only a matter of time.
With the addition of WTI to the basket, Brent's price may fall: the price of dated Brent is based on the price of the cheapest grade in the basket, and WTI has always traded at a discount to Brent. And that's good news for consumers.
By Tom Kool for Oilpice.com
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