Jeremy Poland
Paul Wightman
At a glance
Starting in June, US-produced WTI Midland will be one of the deliverable crudes used as one of the streams in the Dated Brent Price Mechanism.Russian crude oil exports to the EU fell to 1.4 million b/d in November 2022, while US crude oil exports to the region rose to 1.5 million b/d.
The United States has been an exporter to the global oil market since 2016, but in 2023, U.S. crude oil, known as WTI Midland, was incorporated into the Dated Brent pricing mechanism, officially entering the global oil pricing arena. This has increased supplies to Brent, but also significantly increased the role of WTI benchmark pricing on the global stage.
Prior to the addition of Brent crude, only North Sea crude production was included in the benchmark, but as production declined month-on-month, the decision was made to add WTI Midland crude.
The changes have contributed to a significant adjustment in global crude flows in the oil market, with refiners outside the U.S. processing larger volumes of U.S. crude grades, in some cases for the first time. These changes could give international markets more exposure to U.S. crude prices, which could benefit trading of the NYMEX WTI benchmark.
Moreover, the change supports a broader transition underway in the U.S. market, transforming major non-OPEC producers from major importers to large exporters to global markets. Since the U.S. export ban was lifted, crude oil flows from the U.S. have risen steadily, with Asian and European refiners benefiting the most.
WTI Expands Its Influence Over Brent Crude Oil
Now that WTI Midland has been included in the benchmark price for several months, its impact on the Dated Brent price is becoming more clear. According to the latest data from S&P Global Platts and CME Group for the period August 2023 to June 2024, WTI Midland sets the benchmark price for Dated Brent on average 54% of the time.
More U.S. crude oil exports to Europe
The volume of U.S. crude oil exported to Europe continues to far exceed the total volume of Brent crude oil produced from existing North Sea fields, on which the Brent futures benchmark is based. This was one of the main reasons why WTI Midland was included as one of the delivery grades, increasing the total volume of crude oil delivered under the Brent contract.
The latest volumes put U.S. exports at about 1.8 million barrels per day, compared with total production of the Brent crude grade at 650,000 barrels per day. This is a continuing directional trend from the start of 2022 and continues to reinforce the pricing role played by the U.S. benchmark for European market participants.
According to Vortexa data, U.S. crude oil exports (total) to Europe in the 12 months ending in June 2024 will reach approximately 2.2 million barrels per day, representing a 23% year-on-year increase compared to the same period in 2023.
US crude oil trading volumes expand during European hours
WTI's inclusion in the Brent crude oil benchmark appears to have increased interest from clients outside the U.S. in WTI, leading to an increase in the proportion of WTI futures volumes traded during European hours.
According to data from CME Group, since WTI Midland was incorporated into the Dated Brent price, WTI has been trading as an increasing percentage of total trading volume. In June 2024, over 35% of the total daily trading volume of WTI crude oil futures was traded outside of US core hours, up from 25% in January 2023. In terms of trading volume, the June 2024 level represents approximately 900,000 lots, up 16% from the same period 12 months earlier. This also coincides with the formal introduction of WTI as a delivery grade into the Dated Brent crude oil basket.
As grades like WTI Midland continue to play a larger role on the global stage, risk exposure to U.S. crude oil prices from outside the U.S. is increasing. As export cargoes from the U.S. increase, non-U.S. refiners and traders that traditionally relied on Brent to manage risk are paying more attention to what's happening in WTI and the U.S. Gulf Coast. CME Group's Argus-based WTI Midland and Argus WTI Houston futures markets are reflecting this shift, with open interest, the number of open futures contracts, increasing significantly.
US crude oil production soars
So what is behind the surge in U.S. crude oil production? The shale revolution is a major factor in the increase in U.S. production, but demand from the global market is also helping to push U.S. production to record levels. According to data from the U.S. Energy Information Administration (EIA), U.S. crude oil production reached 13.18 million barrels per day in March 2024, slightly below the all-time high recorded in November 2023. In the U.S. Gulf Coast region's key petroleum control district (PADD III), total production reached a record high of 9.565 million barrels per day.
A year after WTI officially joined the Brent crude delivery mechanism, interest in trading it in the U.S. market has increased significantly, both in outside U.S. trading hours WTI crude oil futures volumes and in increased volumes across the WTI-related futures and options markets. Adoption of WTI in international markets is likely to continue to grow as WTI continues to play a more significant role in global crude oil pricing.
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Editor's Note: The summary bullet points for this article were selected by Seeking Alpha editors.
