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.
Before we get into the weeds — which we’ll need to do, given that we’re talking about Brent — let’s first hit a few high points of what’s been happening over the past two months. Midland deals have dominated the Dated Brent pricing mechanism, setting the price 95% of the time in May and 75% in June. North Sea crudes, which for decades have set the price for 100% of Brent, have been relegated to only 5% and 25%, respectively, in May and June. Likewise, most of the cargoes going into the Brent Forward Placement market (“the chains” – in other words, the process of converting a futures deal to a physical cargo) have also been Midland, almost guaranteeing that any buyer of “Brent” these days is going to be receiving barrels of Midland crude. Before the Midland-into-Brent era, 7-10 cargoes per month were delivered into the forward placement chain. Since May that monthly number has doubled. Even for a market that has been preparing for this event for years, it is a big deal.
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