Russia’s 2022 invasion of Ukraine not only led to the demise of Russian pipeline gas supplies to Europe and caused prices to spike, but it also helped create new arbitrage opportunities for U.S. LNG shippers. In today’s RBN blog, we look at the different approaches the U.S. upstream has adopted in response.
In the early 2000s, prices for West Texas Intermediate (WTI) were becoming increasingly disconnected from global fundamentals. WTI reflected conditions in the Midcontinent at the Cushing, OK, crude oil storage hub, where bottlenecks repeatedly distorted its value. In today’s RBN blog, we look at how the problem contributed to the creation of the Argus Sour Crude Index (ASCI) 16 years ago, how the index has evolved and whether it remains relevant today.
CME’s NYMEX light sweet crude oil contract in Cushing, OK, is not West Texas Intermediate — WTI. Instead, it is Domestic Sweet — commonly referred to as DSW — with quality specifications that are broader and generally inferior to Midland-sourced WTI. In fact, pristine Midland WTI delivered to Cushing sells at a reasonably healthy premium to DSW. That difference in specs, and the fact that the quality of DSW is considerably more variable than straight-as-an-arrow Midland WTI, makes most purchasers of exported U.S. crude (and many domestic refiners too) strongly prefer the more quality-consistent Midland WTI grade. For that reason, when Platts set out to allow U.S. light crude to be delivered as Brent, it said that only Midland WTI will qualify. Consequently, a marketer cannot take delivery of a NYMEX-quality barrel at Cushing, pipe it down to the Gulf Coast, and deliver it to a dock for export if the ultimate destination of that barrel is to be reflected in the Brent price assessment. The implication? There are now effectively two U.S. crude oil benchmark grades, each of which is valued differently, priced differently and used by different markets. Is this a big deal for the valuation mechanisms for U.S. crude oils, or just a minor quirk in oil-market nomenclature? We’ll explore that question in today’s RBN blog.
Global crude oil markets are undergoing a profound transformation. But it is mostly out of sight, out of mind for all but the most actively involved players in the physical markets. On the surface, it’s a simple change in the Dated Brent delivery mechanism: Starting May 2023, cargoes of Midland-spec WTI — we’ll shorten that to “Midland” for the sake of clarity and simplicity — could be offered into the Brent Complex for delivery the following month. This change has been in the works for years. Production of North Sea crudes that heretofore have been the exclusive members of the Brent club has been on the decline for decades. Allowing the delivery of Midland crude into Brent is intended to increase the liquidity of the physical Brent market, thereby retaining Brent’s status as the world’s preeminent crude marker, serving as the price basis for two-thirds or more of physical crude oil traded in the global market. So far, the new trading and delivery process has been working well. Perhaps too well. For the past two months, delivered Midland has set the price of Brent about 85% of the time. The number of cargoes moving into the Brent delivery “chain” process has skyrocketed, and most of those cargoes are Midland. Is this just an opening surge of players trying their hand in a new market, or does it mean that the Brent benchmark price is becoming no more than freight-adjusted Midland? In today’s RBN blog, we’ll explore this question, and what it could mean for both global and domestic crude markets.
With ever-increasing volumes of Permian crude oil being exported and the recent inclusion of WTI Midland in the assessment of Dated Brent prices, the issue of iron content — especially in some Permian-sourced crude — is coming to the fore. This has become such a point of emphasis for exported light sweet crude because many less complex foreign refineries do not have the ability to manage high iron content adequately. Iron content that exceeds desirable levels could have far-reaching repercussions, from sellers facing financial penalties for not meeting the quality specifications to marine terminals being excluded from the Brent assessment if they miss the mark. It’s a complicated issue, with split views on what causes the iron content in a relatively small subset of Permian oil to be concerningly high — and how best to address the matter. In today’s RBN blog, we look at iron content in crude oil, why it matters to refiners, how it affects prices, and what steps the industry is taking to deal with it.
Like an aging pop star, price benchmarks have to re-invent themselves from time to time to maintain their status. The Dated Brent marker –– as much a survivor as Cher, still going strong at 76 –– has had successes and setbacks in the past and will undergo yet another transformation by June 2023, courtesy of price reporting agency Platts. You definitely need to pay attention to this change, because Dated Brent is used as a pricing reference not only for several crude oil streams sold around the world, but also for other commodities such as LNG, fuel oil and other refined products and petrochemicals — oh, and financial derivatives too. Also, the latest version of the price marker will include an adjusted price for the U.S.’s prolific West Texas Intermediate (WTI). In today’s RBN blog, we discuss the details and implications of Dated Brent’s latest makeover for traders, refiners and other market participants.
Brent is by far the most important crude oil benchmark in the world, with well over 70% of all global crudes tied either directly or indirectly to the North Sea crude’s price. But the original Brent crude oil production is almost played out, with all of the offshore Brent producing platforms soon to be decommissioned. This might seem to be a big problem, but in the world of crude oil trading, it is a total non-issue, because Brent is no longer simply a grade of crude oil. It is a multi-layered matrix of trading instruments, pricing benchmarks, and standard contracts linked together by price differentials traded across a number of mechanisms and platforms that form the foundation of a robust, vibrant, and extremely important marketplace. Today, we delve further into the mechanics of the Brent complex, the key components that make it work, and the transactional glue that binds them together.
Do not try and refine the Brent; that's impossible. Instead, only try to realize the truth...there is no Brent. Then you will see it is not the Brent that gets refined; it is only yourself. For those who are not fans of The Matrix, that sentence may seem a little cryptic, but it makes a point that is little understood outside the rarified world of crude oil trading. The production of North Sea Brent crude oil is down to less than a couple of hundred barrels per day. Soon it will be gone altogether. But 70% of all crude oil in the world is tied either directly or indirectly to the price of Brent. How is that possible? Well, it’s because Brent is no longer simply a grade of crude oil. Over the past two decades, it has evolved into an intricate, multi-layered matrix of trading instruments, pricing benchmarks and standard contracts that is a world unto itself. A world with a huge impact across almost everything in today’s energy markets. Unfortunately, no one can be told what Brent is. You have to see it for yourself. So that’s where we’ll go in this blog series. Warning: To read on is like taking the red pill.
Oil-production restraint by OPEC and 10 cooperating countries grows more challenging with time, and just when market projections began to hint at relief for the OPEC-Plus group, the spread of the new coronavirus in China and beyond became a sudden and possibly serious impediment to global economic growth and oil demand. Yesterday’s slide in crude oil prices amid newly heightened concern about the potential pandemic’s effects will only add to the challenges that OPEC-Plus countries will face in managing crude supply. So far, the OPEC-Plus group has achieved unprecedented compliance with its production ceilings, which it implemented in January 2017 and has adapted a few times since in response to market pressure. That effort has kept the crude price above the ruinous levels of 2015, memories of which have encouraged quota discipline. But the threat of a major, coronavirus-related slowdown in global oil demand could seriously undermine OPEC-Plus’s efforts, which already had been hurt by dissent within its ranks. Today, we continue our series with a look at Monday’s price drop, the latest supply and demand forecasts and a discussion of the obstacles that might affect OPEC-Plus going forward.
