In January 2016 the ICE futures Exchange changed the expiration calendar for its flagship Brent crude contract. The March 2016 contract expired on January 29, 2016 under new calendar rules that stipulate expiration one month and one day prior to delivery. This was done belatedly to reflect a change in the assessment of the physical Brent market that was implemented back in January 2012. On paper the change is just an overdue action by ICE to properly align the timing calendar for their popular futures contract with the underlying physical market. But in practice - as we suggest in today’s blog, the change has significant impacts on the calculation and analysis of the commonly utilized spread between ICE Brent (the international benchmark crude) and the U.S. equivalent West Texas Intermediate (WTI) crude futures contract traded on the CME/NYMEX.
Brent physical traders are members of an exclusive club that transacts roughly fifty 600 MBbl cargoes of crude a month representing about 1 MMb/d of production. ICE Brent futures traded an average of 500 MMb/d during 2012. These two markets are linked together by the ICE Brent Index that allows for cash settlement of futures. Today we explain the Brent futures delivery mechanism.
North Sea Brent crude plays a critical rolet in setting world oil prices. Here in the US, most folks pay more attention to West Texas Intermediate (WTI) - the North American equivalent benchmark. We regard Brent as just a figurehead for the international market and rarely look beyond the Brent/WTI spread. Yet Brent crude assessments based on physical trades or the ICE Brent futures market are used directly or indirectly to price 70 percent of world oil. Today we begin a “deep dive” series explaining how the Brent crude market operates.