Opinion

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

Subscribe to NrgEdge (www.nrgedge.net) for daily updates on energy news and analysis. Signing-up is a breeze with your existing Linkedin or Facebook login credentials.


Visit source site

https://linkedin.com/pulse/shale-whacks-struggling...

Brent CrudeWTIPlattsnrgedge

More items from easwaran


The LNG Bandwagon Keeps Growing

When Shell purchased BG for US$53 billion in 2016 to become the world 's largest LNG company, it capped off a change in the way the LNG world worked. LNG used to be more of a producer-buyer relationship, with firms like Petronas, Pertamina and Qatargas cutting deals directly with buyers in Japan and ...

Easwaran Kanason


Posted 2 days agoOpinion > LNGgasTotal +2

Geopolitics Is Rearing Its Head Again In Oil

Brent and WTI prices are now at their highest levels in two years. With Brent almost touching US$65/b and WTI within shot of US$60/b, this is cheer for the market, where most participants had resigned themselves to a prolonged period of US$50/b oil. There are several factors propelling this rise. OP ...

Easwaran Kanason


Posted 8 days agoOpinion > WTIOPECBrent +5

The Tight Balance of LNG In Indonesia

Last week, Indonesian state energy firm Pertamina admitted that the country may become a net importer of liquefied natural gas (LNG) by 2020, as soaring demand in the populous western islands dwarf domestic supplies from the energy-rich east. This isn't the first time that this scenario has been moo ...

Easwaran Kanason


Posted 18 days agoOpinion > LNGgasIndonesia +3

Has Drilling in the Permian Peaked?

The current production level in the Permian Basin, as of September 2017, is 2.6 mmb/d. That is enough to make the Permian, which straddles Texas and New Mexico, the single largest production area in the US, having exceeded offshore output from the Gulf of Mexico since early 2016. Projections indica ...

Easwaran Kanason


Posted 24 days agoOpinion > PermianWTIOil +1

US Crude Gains More Market Share in Asia

The spread between the world's two benchmark crude oil markers – Brent and WTI – is currently hovering at US$6/b. This is the widest gap between the two for a long while, first breaching the tight US$2/b spread range since 2015 in the run up to Hurricane Harvey as traders fretted that widespread ref ...

Easwaran Kanason


Posted 1 month agoOpinion > OPECOil & GasEnergy +4
All posts from easwaran