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Brent crude oil price basket now includes U.S. crude oil

Declining production of the five North Sea crude oil grades in the Dated Brent benchmark has prompted the price reporting agency S&P Global Commodity Insights (previously called Platts) to add West Texas Intermediate (WTI) Midland crude oil to the basket of crude oil grades that determine Dated Brent prices, beginning with the June 2023 delivery. WTI Midland is produced in the Permian region, which spans Texas and New Mexico. The corresponding Brent futures price benchmark is a cash-settled contract, traded on the Intercontinental Exchange (ICE), for transactions involving physical cargoes of several specific crude oil grades in the North Sea, between the United Kingdom and Norway. Brent crude oil is a price benchmark regularly used for other crude oil, petroleum product, and natural gas financial transactions, so changes to the determination of the Brent benchmark affect world commodity trade.

S&P Global Commodity Insights has added new deliverable grades to the Brent benchmark several times because of continued production declines. The most recent addition was Troll in 2018 (Figure 1). WTI Midland is the first new deliverable grade that comes from outside the North Sea. As crude oil field production naturally declines, fewer barrels are available to trade. Higher volumes of oil allow more buyers and sellers to participate.

Figure 1. Dated Brent crude oil loadings

Adding a U.S. crude oil to the Brent benchmark introduces some challenges but also several advantages. Delivery time and transportation costs for shipping U.S. crude oil to Europe will now factor into price formation, potentially increasing complexity. On the other hand, adding U.S. crude oil to the Brent basket will bring a source of growing crude oil production to the benchmark, supporting efforts to maintain volumes traded on the contract.

U.S. crude oil exports to Europe have grown over the past year, particularly after Europe banned seaborne crude oil imports from Russia in late 2022. According to our Petroleum Supply Monthly, U.S. crude oil exports to Europe averaged 1.7 million barrels per day (b/d) in January 2023, up from 1.2 million b/d in January 2022 and 0.9 million b/d in January 2021. Based on data from Vortexa Analytics, we estimate U.S. crude oil exports to Europe averaged 1.6 million b/d for February and March 2023 (Figure 2).

Figure 2. U.S. crude oil exports to Europe

As a result of growing U.S. crude oil exports in recent years, futures exchanges ICE and CME Group launched U.S. crude oil futures contracts in the Permian and the U.S. Gulf Coast. These futures contracts add to the existing ICE Brent futures contract and CME Group’s WTI futures contract in Cushing, Oklahoma. Two active crude oil futures contracts that reflect WTI crude oil prices in Midland and Houston recently increased in trading volume and open interest (number of futures contracts outstanding). This increase suggests that more traders are using Midland and Houston WTI contracts to manage financial transactions prior to WTI Midland becoming part of the ICE Brent contract. In March 2023, the combined open interest for WTI Midland and WTI Houston averaged nearly 400,000 contracts, an all-time high (Figure 3). For comparison, WTI Cushing averaged 1.8 million contracts and ICE Brent averaged 2.2 million contracts.

Figure 3. Average daily crude oil futures open interest

We forecast both Brent and WTI Cushing spot prices in our Short-Term Energy Outlook (STEO). The price difference between these crude oils primarily reflects the pipeline and shipping costs of moving WTI Cushing crude oil to the U.S. Gulf Coast for export. Including WTI Midland in the Brent price may slightly reduce the price spread between Brent and WTI Cushing. This reduction could occur because Dated Brent’s price is set based on the least expensive deliverable grade into the benchmark. Even after accounting for transportation costs, trade press reports indicate that WTI Midland has been the least expensive deliverable grade several times in recent years. However, we do not anticipate that this situation will meaningfully narrow the Brent price spread with WTI Cushing.