LOOKING AHEAD: Are crude oil benchmarks still up to the mark?

• Published date: 01 January 2018
• Date: 01 January 2018
• DOI: http://doi.org/10.1111/oet.12550

LOOKING AHEAD

Are crude oil benchmarks still up to the mark?

Since the early-1980s, crude oil produced in the North

Sea has been the principal benchmark against which

other crudes are priced across the world. From 1981 to

1984, the reference crude was the UK’s Forties blend,

aer which another British North Sea crude, Brent, was

adopted. e existenc e of a large number of oil produc-

ers, reners, and traders who were willing to trade these

two crudes led to the creation of a market that was seen

as being representative of actual trading conditions in

North West Europe. Gradually, the price of Brent began

to be used in the pricing ofsimilar crudes in other parts

of the world, such as West and North Africa.

e development of a forward market in Brent

increasedtheversatilityofthecrudebyallowinghedg-

ing and brought in more parti cipants in both the sp ot

and forward markets . Trade increased still further with

the establishme ntof a Brent futures contract at L ondon’s

International Petroleum Exchange (IPE).

Otherforwardandfuturesmarketswereestablished

in other parts of the world, notably West Texas Inter-

mediate (WTI) futures on the New York Mercantile

Exchange (Nymex), Oman crude futures on the Dubai

Mercantile Exchange (DME) and a forward market in

Dubai crude. WTI, like Brent, was a light, sweet crude,

while Oman and Dubai served as benchmarks for the

Middle East sour crude markets. Crude oil began to be

traded on the ba sis of formulae that incorporated one or

more of the principal benchmark crudes, according to

thetypeofcrudeandthemarketitwasbeingtradedin.

Brent

At present, Brent is used to price crudes in all the major

markets of the world. It is universally used for crudes

traded in Europe and in several crude formulae used to

pricecrudesinAsiaandtheWesternHemisphere:and

its use is by no means conned to light, sweet grades. All

the major sour cru de producers use it for their Europe an

sales. East of Suez, Dub ai, and Oman are used as marker

grades, but a numbe r of exporters of both swee t and sour

crudes have price formulae that use Brent. Brent is also

used in parts of the WesternHemisphere, although WTI

is the traditional reference grade.

WTI and ASCI

ere has always been a major diculty in using WTI in

international markets. It is primarily a domestic crude

and, unlike the other main marker crudes, for most of

its existence it has not gone outside its domestic mar-

ket. Its pricing point–Cushing, Oklahoma –is a pipeline

junction rather t han a crude oil export terminal , as used

by Brent and other international reference grades. Since

2015, however, WTI has become more widely traded

internationally following the removal of restrictions by

the US government on its export; but problems remain.

WTI’sinvolvement in international trade remains low

and, as such, its price relates to a considerable degree to

domestic US conditions. e result ofthis is t hatits price

can uctuate wild ly for purely domestic reasons. It ought

to trade more or less in line with other international

marker crudes, like Brent (see below); but this has been

far from the case dur ing recent months, which have seen

sharp changesbetween the futures price of WTI and that

of Brent. e prompt-month dierential between the

twohasrangedfromjustover$2/bblsincethebeginning

of 2017 to a high of $7.05/bbl at the end of December.

WTIwastradingcloseto$3/bblbelowBrentinthe

rst half of August. By the end of the month the dier-

ential had climbed over $5.50/bbl as hurricanes closed

portsintheUSGulf,preventingWTI’sexportandcaus-

ing large volumes of it to pile-up in Cushing and else-

where, which brought its price down by more than $3

versus the startof the month while Brent remained close

to its earlier levels.

Light, sweet WTI has a further disadvantage when it

comestoactingasthemarkerforUScrudeoilmarkets,

especially on the Gulf Coast, which is dominated by

oshore production and exports of sour crude, as well

as being the main US market for imported sour crudes.

Both exports and imports of sour grades are priced

o the Argus Sour Crude Index (ASCI), compiled by

London-based Argus Media, using US oshore Mars,

Southern Green Canyon, and Poseidon.

Brent out of line

Brent prices, however, can also go out of line with other

markets, as in December 2017, when a crack in the

pipeline from the U K’s Forties eld to the onshore e xport

terminal at Hound Point caused the pipeline to be shut,

removing about 400,000 bpd of North Sea crude from

the market. e subsequent scramble for replacement

barrelscaused the price of other NorthSea crudes to rise,

taking Brent futures over $67/bbl: about $7 above WTI.

Such volatility makes trading hazardous, especially for

companies wanting to hedge future sa les or purchases,

© 2018 John Wiley& Sons Ltd