Brent basket urgently needs changes due to falling oil volumes

Oil&Gas Materials 5 April 2022 11:52 (UTC +04:00)
Laman Zeynalova
Laman Zeynalova
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BAKU, Azerbaijan, April 5. Given the falling volumes of oil in the ‘Brent basket’, some changes are urgently needed and the inclusion of WTI Midland is a potential remedy despite of the complexities involved, Trend reports with reference to Oxford Institute of Energy Studies (OIES).

Introducing an alternative delivery of a similar grade into any contract not only increases liquidity, but also the depth of the market with new players having interest to get involved, OIES analysts believe.

OIES said in its report that the latest Platts proposal to include cargoes of WTI Midland crude oil in both its Dated Brent crude oil benchmark (starting June 2023 deliveries) and Cash or Forward16 BFOE contracts, but to maintain their assessment on FOB basis may result in little or no change on the existing futures and other derivative contracts.

“This makes the proposal difficult to reject in principle. However, more work is needed to make the change happen: New GT&Cs need to be written; USGC and terminal approvals need to be obtained; and quality inspections need to be implemented. It may be a good idea to exclude nominations for only first and last 3 days. A change of the parcel size from 600,000 to 700,000 barrels should not be a problem from a trading point of view in the North Sea as minimizing dead freight is a standard practice already,” says the report.

Most importantly, the Institute analysts note that the gap between FAF for Dated and Forward WTI Midland cargoes needs to be narrowed.

“It can be done by using 80% FAF for Dated deliveries, in line with the other BFOET grades. This would ensure the convergence of the forward and physical cargoes at the expiry of each monthly contract. Given the recent Russian invasion of Ukraine, the importance of WTI Midland in Europe should only increase, likely making it a dominant grade in the ‘Brent basket’ anyway. This raises an obvious question: If WTI Midland becomes a dominant grade in the Brent benchmark, why bother with Brent at all and not move to a WTI-based benchmark such as one of the FOB USGC assessments? Most of the FOB loading points in the USGC continue to trade based on one of the most liquid futures crude oil contracts, the NYMEX WTI Crude Oil futures (CL). But this contract has its own problems, having traded at deep negative prices in April 2020. 26 For now, Brent in all its manifestations and derivatives remains a major global oil benchmark and deserves a good and lasting fix. In the long run, it is for the market to decide if Brent is to retain its dominant status as a global oil benchmark,” the report reads.


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