Oil markets continued to focus on the outlook for demand with the global economy showing further signs of economic weakness. In the first six months of 2023, oil demand has failed to receive a welcome boost from the reopening of the Chinese economy with consequent negative impact on oil prices.

Given the uncertain economic backdrop, OPEC announced an unexpected cut in production at the beginning of April 2023 of 500K barrels per day and a further cut of 1M barrels per day (for July) in early June 2023. 

Global crude oil prices declined around $10 per barrel between the start of April and early June as traders weighed up concerns about the demand outlook for oil. 

Chart 1: Crude prices weaken despite OPEC cuts

Middle East crudes under pressure from growing Asian imports of U.S. crude

The price of sour crude remains strong compared to the alternative sweet grades trading in the Atlantic basin. The effect has been that sweet/sour spreads have continued to weaken. The spread between grades such as WTI Midland and other grades in the Middle East including Dubai or Oman have fallen further. 

Exchange data shows that the spread between WTI on a delivered basis in Singapore and Dubai traded close to $3.80, a fall of around $9 per barrel from the levels seen in Q4 2022. Similarly, the much-watched Brent-Dubai and Oman spread traded close to parity in late May 2023, a fall of around $6 per barrel from Q4 2022. Prices at the lower levels imply that the arbitrage for Atlantic basin including U.S. crudes to Asia is potentially open and paves the way for higher exports to Asian refiners.

However, weaker naphtha crack spreads in Asia were seen as one limiting factor on the flow of sweeter crudes into Asia. Exchange data showed that Singapore naphtha crack spreads traded down below negative $20 per barrel, the lowest level seen in 2023 so far. 

Chart 2: Atlantic basin crudes trade at discounted levels

Prices in the Middle East have also come under pressure from declining crude prices in the Atlantic basin. The spread between NYMEX WTI and the DME Oman Crude Oil futures at the Singapore close fell to negative $4.50 per barrel, the lowest level for over three months.

Chart 3: Oman premiums to WTI continue to rise

WTI takes the global stage

A fundamental change happened in the crude oil market in early May 2023 when S&P Global Platts permitted the delivery of WTI Midland into the Brent crude oil market.  The change will alter the way that the North Sea crude oil market is traded with oil traders managing risk on an increasingly large flow of U.S. cargoes destined for refineries in Europe.

Total exports of U.S. crude bound for Europe reached 1.75M barrels per day in 2022, which was an increase of 70% on 2021 volumes. The higher flows of U.S. crude to the international markets helps to promote the role of WTI as a financial benchmark in the global crude oil trade.

WTI Midland flows into Brent

The North Sea market is undergoing changes, due in part to the declining volumes of crude oil within the current basket of crude oils for Brent, Forties, Oseberg, Ekofisk, and Troll (BFOET). From June 2023 the U.S. grade WTI Midland will become one of the deliverable crude oils into the Brent forward contract and used as one of the crude streams in the Dated Brent pricing mechanism. The Brent forward contract consists of the trading of cargoes of 700K barrels of any of the BFOET streams (including WTI Midland) for delivery beyond month ahead, with no specific dates assigned for loading. At the point the holder of a forward contract notifies a buyer of specific loading dates and which crude cargo is being loaded, the cargo is deemed to have moved from the forward to the Dated Brent market.   

The inclusion of WTI Midland as a deliverable crude oil into the forward Brent contract has generated greater interest in the U.S. crude oil market and all the associated derivatives markets such as the U.S. grades, including WTI Midland and WTI Houston, that price linked to NYMEX WTI Crude Oil futures.

WTI Midland offsets North Sea declines

Production in the North Sea market has been falling since 2016 and there have been numerous attempts to bolster the amount of available crude oil for delivery into the forward cash Brent contract and ultimately to underpin the Dated Brent benchmark (into which the forward Brent converges). 

Based on the latest data from the U.S. Energy Information Administration (EIA) and Bloomberg, the total volume of U.S. crude exported to Europe in October 2022 was around 865K barrels per day, more than the volume loaded at the existing North Sea crude terminals for the grades that underpin the Brent contract. 

Chart 4: U.S. crude exports continue to outpace North Sea volumes

Volatility between the U.S. grades and WTI as well as the Brent benchmark has drawn greater trading interest in the benchmarks for WTI Midland and WTI Houston. Traders are increasingly looking to manage any associated price risk to the underlying markets through the trading of the listed futures markets listed at CME Group. Trading interest in the WTI and U.S. grades markets is coming from trading firms, producers, and refiners on both sides of the Atlantic, which is expected to lead to a rise in overall trading volumes as WTI Midland becomes further embedded into the Brent pricing mechanisms. 

The total volume of WTI Midland and WTI Houston Crude Oil futures versus WTI averaged 165K lots per month YTD April 2023, an increase of nearly 70K lots over the same period in 2022. 

Chart 5: Volumes of U.S. crude grades nearly doubles in 12 months

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.

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