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Introduction

Crude oil markets are dominated by a small number of reference crudes against which nearly all of the world’s oils are priced. The two principal benchmarks are the Brent crude and West Texas Intermediate (WTI), which are the mainstay of the London and New York futures markets, along with North Sea Dated (which includes Brent) and Dubai.

Since the 1980s, Brent in one form or another has been used as the pricing basis for much of the international trade in sweet crudes, as well as featuring in formulae for the pricing of many sour grades. WTI tended to reflect trading within North America; but the recent liſting of many of the restrictions on the export of crude from the US has led to its being more widely traded internationally and it, too, is becoming something of an international benchmark.

Falling North Sea production

Brent futures and North Sea Dated, which includes Brent, have long been the mainstay of the international trade in sweet crude. As North Sea production has declined, particularly that of Brent, the North Sea Dated assessment has been widened to include other North Sea crudes. The addition of these fields, most recently Troll, to the mix should help the index to be more representative of the output of the North Sea, but there are drawbacks as well. For example, the combined crudes differ in their distillation yields, their prices do not always move in the same direction and there have been concerns over the dominance of Statoil in the benchmark, since it liſts more than three-quarters of Troll’s production.

Changing Dubai – the role of the Middle East

Dubai is used as a reference price in markets east of Suez and therefore for the pricing of 19mn bpd of Middle Eastern and Russian crude sold in Asia. The difference between Dubai and Brent is a key indicator of the price relationship between the Atlantic Basin and Asian markets, and has an important role in determining oil flows between the two.

The use of Dubai crude as an international benchmark is affected by similar problems of declining output as the North Sea: only more so with production having fallen from almost half a million bpd in the 1980s to about 50,000 bpd today. As in the North Sea, the problem has been addressed by adding other crudes to the mix so that the assessment now includes Oman, Abu Dhabi’s and Qatar’s al-Shaheen fields, which gives an underlying production of about 3.5mnbpd to the Dubai reference price.

US benchmarks needed

While WTI futures remain the marker for much of the domestic market, the revival of US oil production and the growth of exports have led to the need for new benchmarks for the US. Sour crude producers have been searching for a benchmark that more accurately reflects the crude they sell rather than light, sweet WTI. A basket known as the Argus Sour Crude Index (ASCI) has been put forward for the role. ASCI is a volume-weighted average of three US medium-sour grades produced in the Gulf of Mexico; Mars, Poseidon and Southern Green Canyon.

Conclusion

The evolving economics of the oil industry are changing how benchmark prices are calculated. The three biggest exchange-traded contracts – WTI, Brent and Dubai – are all undergoing considerable evolution. Currently, the Brent crude oil contract is considered the global benchmark, but some market watchers said because of the sweeping changes occurring in the U.S. , that the WTI contract will regain its crown as the global benchmark.

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