Shale whacks struggling Brent

For a bunch of crude oils that collectively produce about a million barrels per day, the Brent, Forties, Oseberg and Ekofisk streams that collectively form the Dated Brent benchmark sure have a huge influence on global crude prices. Used as a reference point in about two-thirds of global oil deals, it underpins billions of dollars in futures, options and other derivatives. Not bad for a little corner of the world where oil production is declining. 

But that declines poses a problem. To be an effective benchmark, a price needs to represent trading patterns in the areas that reference it. What relationship crude oil trading in Africa or Asia have to do with North Sea crude is debatable, but Dated Brent is still used as the benchmark across the Old World. To add to that, the production of the crudes that make up Dated Brent (BFOE for short) are declining, which necessitated adding Forties and Oseberg in 2002 and Ekofisk in 2007 to the Brent Blend to boost liquidity and activity in the trade. And now a fifth stream will join, with S&P Global Platts adding Norway's Troll crude in the mix from January 2018. 

Contributing an additional 200 kb/d to the makeup of Dated Brent, the move is but a bandaid in addressing the larger concerns surrounding the benchmark. Some traders have argued that they would have preferred to retain the existing price assessment methodology with tweaks to better account for the differing grades of the four existing crudes, with the move adding more complexity and not enough differentiation to properly account for the grade pricing. Traders are also concerned that the new mix gives Norwegian producer Statoil greater influence over pricing, breaking the more well-balanced assessment between Shell, Total and Statoil under BFOE. But Platts appears to be most concerned with expanding the assessment of physical volumes – hence the move, since 1 mmb/d of Brent physical production is estimated to account for some 500 mmb/d of Dated Brent oil trades.

Despite the debate over the Brent expansion, it is still a short-term solution. The physical volumes of BFOET will still decline over the next decade to a level where Platts may feel compelled to act again. So what next? Add another stream, and another, and another, diluting the efficiency of the algorithm? One solution mooted is to add West African or Central Asian crudes delivered into Rotterdam to the mix, to better account for the blend of crudes swirling around Europe and Asia. The answer is pertinent, because the oil world's other benchmark is gaining strength. Trade in the West Texan Intermediate (WTI, governed by the CME Group) is growing; long considered a domestic benchmark due to the import nature of the US oil industry, the shale revolution is sending American oil volumes out to the world, morphing WTI into a benchmark with growing international clout. So Brent needs to adjust as well to defend its representation of the international market. How it does so is up to Platts to figure out, but for now, the Troll plaster is patching up a growing wound.

Easwaran Kanason

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