Increased exports of oil from the United States into Europe and Asia have resulted in U.S. crude regaining its position as the primary determinant of international oil prices, displacing North Sea grades that have historically held this role. This shift has had the positive effect of reducing volatility and limiting trading plays that have distorted the established Brent oil benchmark, based on North Sea crudes. The trend is seen as beneficial for consumers who have been grappling with high inflation fueled by energy prices. Additionally, the change has shifted power to U.S. companies and traders in the oil market.
The rise of U.S. crude as the primary determinant of international oil prices can be attributed to declining volumes from aging North Sea fields, while U.S. production continues to rise due to the shale revolution. To reflect this change, oil-index publisher S&P Global Commodity Insights added the U.S. crude grade WTI Midland to the dated Brent benchmark. This addition has fast-tracked the U.S. grade as the most important in the world, according to John Evans, an oil broker at PVM.
The consolidation of the two international benchmarks, Brent and WTI Midland, has led to a reduction in volatility in the Brent crude spreads. Previously, traders sought profits by manipulating the spreads when a monthly contract expired. However, the larger volumes of WTI Midland available have prevented such manipulation.
The addition of WTI Midland to Brent has also brought about a redistribution of market power. Previously, companies with stakes in North Sea fields or infrastructure had better insight into market-moving developments. Now, U.S. suppliers have become the marginal powerful players in the market due to their knowledge of production, scheduling, shipping, and port issues.
Some analysts have raised concerns over the transparency of the market with the inclusion of WTI Midland. While producers issue a list of North Sea cargoes for export every month, no single company or operator is in charge of the Midland program, making the market less transparent. Efforts are being made to address this by creating a loading program for WTI.
Despite these concerns, industry experts believe that the benefits of including WTI Midland in the Brent complex will become more apparent over time. The change has brought new players into the Brent market, widening the base of people involved and increasing transparency.
Overall, the shift from North Sea grades to U.S. crude as the primary determinant of international oil prices has resulted in reduced volatility and limited trading plays, benefiting consumers. It has also shifted market power to U.S. companies and traders. While concerns over transparency have been raised, industry experts believe that the benefits of the change will become more prominent in the future.
More detail via Investing.com here… ( Image via Investing.com )