The role of the WTI benchmark looks set to grow further with the inclusion of U.S. grades into the Brent benchmark which have historically referenced local supply. Europe has become a significant refining center for U.S. linked crude oils and the volume of imports into the region continues to outpace the crude production of the Brent BFOET oil fields. The enhanced role that the U.S. is playing
U.S. WTI crude price influence grows in Europe
U.S. Midland crude oil from the Permian basin looks set to play a bigger role on the global stage following a recent announcement by S&P Global Platts that they are considering its inclusion in the Dated Brent pricing mechanism.1 Such a move is positive for the WTI crude oil benchmark and potentially brings it into the North Sea market on a more formalized basis.
Crude flows have been changing over the past several years following the lifting of the crude oil export ban in 2015. The U.S. produced around 12 million barrels per day in 2021, around 20% more than Saudi Arabia or Russia.2 The U.S. is a major source of freely tradable crude oil and exportable globally by function of the Brent-WTI spread. Refiners from Europe to Asia are processing greater quantities of U.S. crude oil, which is supportive to the further growth of the WTI crude benchmark.
U.S. exports to Europe outpace Brent supply
In 2021, U.S. crude exports to Europe continued to outpace the total supply of the North Sea crude streams that underpin the Brent futures contract. The key crude streams that fulfil this role are Brent, Forties, Oseberg, Ekofisk, and Troll, referred to as BFOET. In 2021, total exports of WTI linked crude from the U.S. to Europe reached 1.2 million barrels per day compared to just over 750,000 barrels per day for BFOET. The 2021 volumes were broadly flat on 2020 but showed a 10% increase on 2019 levels. As U.S. crude exports gain deeper penetration in global oil markets, WTI has extended its leadership as a key price-setting indicator on the global stage.
Chart 1: U.S. exports to Europe continue to exceed key BFOET North Sea crude supply3
The large refining center of Northwest Europe was a significant buyer of U.S. crude in 2021, U.S. Energy Information Administration (EIA) data showed. The pace of imports also increased throughout the year with volumes rising from 500,000 barrels per day to just shy of 1 million barrels per day by the end of the year. For the Netherlands, U.S. domestic crude grades accounted for around 30% of the total refining capacity4 during 2021. The UK was another significant buyer of US crude reaching around 230,000 barrels per day or just under 20% of total refining capacity in 2021, based on EIA data.
Chart 2: U.S. crude imports into Europe spread
Non-U.S. hours trading volumes for WTI remain strong
As a result of the increased demand for US crude, volumes of WTI futures traded outside of U.S. trading hours are continuing to grow, CME Group data shows. Total volume of WTI futures traded in non-U.S. hours reached around 195,000 lots per day or 195 million barrels of oil in 2021 and remained just below this level in Q1 2022. To put this into context, a standard Brent related crude oil cargo in the North Sea is currently 600,000 barrels which represents 600 lots in futures with 1 lot equivalent to 1,000 barrels. The total volume of WTI futures traded in non-U.S. hours reached an average of 20% in 2021, little changed on 2020 levels.
Chart 3: Non-U.S. hours WTI volume reaches 20%
The growth of Midland – a boost for WTI
CME Group is actively involved in the development of the markets across the Permian basin and offers futures markets in the Argus Midland and Argus Houston WTI crude oil contracts. Total traded volumes in both contracts reached 90,000 lots per month on average in 2021, which was just slightly below the levels seen in 2020, but this was partly because of the record volumes seen during the onset of the COVID-19 pandemic. The 2021 volumes were 10% higher than the 2019 volumes. In January and February 2022, total volumes of futures traded around the Permian basin were 114,000 lots or 114 million barrels, an increase of 7.5% on the prior January and February period in 2021.
Chart 4: Permian basin crude futures volume are robust
The potential inclusion of WTI Midland as a deliverable crude oil into Dated Brent is likely to further re-enforce the global benchmark status of the U.S. crude. The change means that for the first time U.S. crudes are embedded directly into the North Sea market. The role that Midland crude oil is expected to play will be very positive for WTI crude futures as Midland crude trades on a spread basis against it.
To account for the variance in the freight costs and the time lag between the loading periods for BFOET cargoes and US Midland crude oil cargoes, S&P Global Platts propose to assess all crudes on an CIF Rotterdam basis with a freight netback to the established ports. This process is expected to see a greater volume of Midland crude oil delivered into the Dated Brent benchmark which will be a significant boost for WTI as much of the North Sea crude market has traditionally been Brent linked.
In 2021, the volumes of crude oil grades in the Brent benchmark were broadly equal to the volumes of U.S. crude grades being exported into northwest Europe.
Volatility in Brent-WTI spreads sees increased hedging
The price spread between WTI and Brent has been volatile with the price trading in a range of $1 to $10 per barrel. The daily change in the WTI-Brent spread has focused the attention of the commercial hedgers and financial participants to put in place strategies to manage the price risk on the spread between both crude oil benchmarks.
Chart 5: WTI-Brent spread trades in a $10 range
Conclusion: U.S. retains strong position as price leader
The role of the WTI benchmark looks set to grow further with the inclusion of U.S. grades into the Brent benchmark which have historically referenced local supply. Europe has become a significant refining center for U.S. linked crude oils and the volume of imports into the region continues to outpace the crude production of the Brent BFOET oil fields. The enhanced role that the U.S. is playing on the international stage can only be a positive outcome for the WTI crude oil benchmark, and further adoption of WTI as a benchmark crude oil in regions like Europe and Asia seems likely with higher crude flows into these regions.
- Brent, Forties, Oseberg, Ekofisk and Troll or BFOET are the main grades which underpin the Brent contract.
- EU Refinery data – Concawe https://www.concawe.eu/refineries-map/
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.