TOCOM Energy

Price reporting agency Platts confirmed the inclusion of West Texas Intermediate(WTI) Midland in the forward Brent contract from June 2023 and provided further guidance. The changes are necessary for two main reasons: the fall in North Sea production and trade and the increase in Europe’s oil imports from the USA.

“Brent” itself is the name of a light sweet grade of oil first produced in 1976, in the early stages of the current oil pricing system, Brent acted as a representative for North Sea crude oil and price reporting agencies relied on the trading activity in this grade to identify the price of the benchmark.

Falling production has seriously eroded the original benchmark, but it has been reinvented time after time by including new grades of oil into the assessment basket, collectively, those grades are known as the BFOET. The inclusion of additional streams into the original Brent benchmark means that Brent has become a basket of different light, sweet grades rather than a single crude.

Platts also extended the assessment window and included the above oil grade on a CIF Rotterdam basis.

The second reason that Platts adds WTI midland in the Brent basket is that US flows to Europe are becoming large enough to impact North Sea activity, as they compete directly with local oil grades.

Since the US export ban was lifted in December 2015, the grade has become a mainstay within the region’s refining sector, moreover, with the EU’s ban of Russian crude imports, refiners have sought after WTI Midland amongst others to help backfill the loss of light sweet Russian grades. In March, Europe is set to experience a record surge in WTI Midland crude flows, as demand for American crude booms. The impact has been taken seriously by the PRAs, which have started assessing delivered prices of US grades in Europe.

The word Brent on its own is often used as a shorthand to refer to any or all of the individual components of the entire “Brent Complex”, which includes the trading of physically delivered oil like forward Brent and Dated Brent as well as financially settled derivatives like Brent Futures, Contracts for Differences (CfDs), and a variety of other derivatives.

The Forward Brent market sits at the heart of the Brent complex, the Brent forward market deals with cargoes that load at least one month in the future. Neither the actual loading dates nor the specific grade of the cargo are known at the time of the transaction. The producer has to nominate the buyer their preferred date for loading at least one month before the loading window. Once the deadline for nominating a cargo has passed, the cargo turns physical and it can then be traded as dated Brent cargo as precise loading dates will be attached to that cargo. Dated brent usually reflects crude oil to be delivered in the short term, over the period 10 days to one month ahead.

The assessment of the outright price starts in the Brent forward market through the trading of forward contract. Then, based on the values of weekly CFDs, Platts gets the Forward Dated Brent curve. Using this curve, the value of oil with different loading dates is brought back to a common denominator (forward Brent).

Platts then assesses the differentials of a wide variety of crudes relative to the Forward Dated Brent. Based on these assessed differentials, Platts calculates the fixed price of these crudes, the most competitive grade of crude defines the final printed price of the Dated Brent assessment each day.

According to the guidance, Platts will publish assessments of WTI Midland in Northwest Europe on a CIF Rotterdam bases. So how will Platts include a CIF offer in the FOB assessment? The freight adjustment factor is designed to allow CIF and FOB cargoes to play an equivalent role in the Dated Brent benchmark. If a firm offer for one of the grades reflected in the assessment after adjusting for freight, port fees and sailing time, is more competitive than a comparable bid for those grades on an FOB basis, then the CIF offer would take precedence in the final assessment of Brent on the loading dates in question.

It can be seen from the Table that WTI regularly trades at a discount to North Sea grades once freight is subtracted. It means that WTI will probably set the prices of the new benchmark Brent in the future.