WTI’s Growing Dominance

The world's two most relied-upon crude oil benchmarks are WTI, predominantly traded on CME Group, and Brent, its European peer. Their attractiveness to financial investors is subject to a number of moving parts: the underlying supply/demand balance, economic considerations, weather and geopolitics. The weekly reports of the Commitment of Traders provide a timely snapshot of money managers' appetite. While the absolute value of Net Speculative Length (NSL) is exclusively the function of the factors mentioned above, the ratio of WTI and Brent NSL provides a helpful insight on the relative significance of the markers.

Notably, for the week ending May 21, WTI's share of the total crude oil NSL pie increased considerably, jumping from 32% to nearly 50% week-on-week, and further increased in relevance, up to 54%, during the latest reporting period. These weekly changes underpin a longer-term trend, which sees a growing prominence of the major U.S. crude oil contract. There are several reasons to conclude that WTI will become an increasingly more salient actor in the foreseeable future:

  • Russia's invasion of Ukraine and the outbreak of atrocities between Israel and Hamas have not impacted oil supply adversely from these two critical oil-producing regions, which rely on Brent as a benchmark.
  • Yet, tension around the Suez Canal and the consequent longer voyage time around the Cape of Good Hope makes U.S. crude oil an attractive alternative for Europe.
  • The inclusion of WTI Midland in the Brent basket leads to rising demand for U.S. crude manifested in healthy U.S. crude oil export volumes, which flirts with the 5 mbpd barrier.
  • The opening of Canada's 890,000 bpd Trans Mountain pipeline is also seen as supportive for U.S. grades.

The list above discernibly illustrates the increasing role U.S. grades and within that WTI plays in the international crude oil market. It is manifested in the tightening of the WTI/Brent arbitrage. Front-month WTI has traded at a discount of $4.72 in the first five months of this year, palpably narrower than the $5.25/bbl gap registered during the comparable period of 2023. Barring any fundamental change in the U.S. crude oil landscape, or disruption in the Middle East, the arbitrage is expected to turn even slenderer and any occasional weakening in its value will be greeted with fierce WTI buying against its European counterpart.

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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