U.S. crude helps fix world’s key oil price

(Bloomberg) – Almost exactly two years ago, bp Plc shocked the global oil market by saying that its most important pricing benchmark — the North Sea crude price Dated Brent — was experiencing “regular dislocations.”

The British oil major — itself one of the world’s largest energy traders — warned of trouble for both the gauge itself and Brent futures, a multi-billion financial market used to hedge physical transactions but also to speculate.

Nearly three months into a revamp of the measure — by allowing U.S. oil to help set the benchmark — and it is clear that the overhaul has solved at least some of the challenges the London-based firm identified. A supply influx has vastly widened the pool of tradeable cargoes and, according to some traders, made Dated Brent less prone to sudden price moves.

“Falling supply has been the biggest problem for Brent, so the whole idea of the inclusion of WTI Midland was to increase liquidity and prevent squeeze in the Brent benchmark,” said Adi Imsirovic, Director of consultant Surrey Clean Energy and a veteran trader, who is also the editor of the book Brent Crude Oil, published in late May.

At the core, there is just a lot more oil to buy and sell, and the consequence of that has been that anyone bidding for bbl is no longer doing so at a time when supply might happen to be limited.

Prior to WTI Midland’s inclusion, one or two traders sometimes held more than 40% of total supply in some months, according to data compiled by Bloomberg. It could leave as little 9 MMbbl a month outside of their control.

If they subsequently made bids for bbl that decided Dated Brent, they might do so on dates when supply was relatively tight, boosting the benchmark and setting off a range of consequences for related derivatives.

WTI Midland’s inclusion has made that harder, according to traders involved in the physical trading of bbl in Europe.

Platts said the inclusion of WTI Midland has boosted the amount of crude underpinning Brent benchmarks and will continue to do so for decades to come. It declined to comment on the actions of individual market participants.

Benchmark barrels. The total supply of benchmark grades — Brent, Forties, Oseberg, Ekofisk, Troll and now WTI Midland — almost doubled. Although some traders built up large positions, the volume outside their control has jumped.

There has been active bidding this month on Platts’s pricing window.

On July 11, a total of 12 bids were placed without finding any sellers. Despite this, prices of major North Sea grades hardly moved. WTI Midland was cheaper than Forties grades for most of the time, despite its superior quality. This has put pressure on competing light, low sulfur crudes.

Chain effect. The inclusion of WTI Midland into Brent has also another side effect on many North Sea producers, as they can’t put their own cargoes into so-called chains.

Common in North Sea oil trading, the chains allow a company with forward contracts to sell actual boe to another firm, providing a link between paper and physical markets. Normally, only the cheapest grade is put into the chains.

Since early May, a total of 51 cargoes ran in chains. Six were Forties, while the rest were all WTI Midland, according to data compiled by Bloomberg.

Before May, the chains were dominated by Forties. So, if a producer had a Forties cargo that they didn’t want to sell to the market, they could just declare it as a forward cargo and put it into chains.

Now, because WTI Midland is generally cheaper, the chains are flooded with the U.S. grade, meaning producers there will have to work harder to sell their cargoes.