In this third instalment of a special series on North Sea benchmark pricing, we discuss the idea of adding US crude oil WTI to the Brent basket.
Join Amanda Hilow and James Gooder as they discuss the details of this option, which has been building steam in recent years. Can it work, and what are the impediments?
The Brent basket burden
We are looking at the different options for bringing volume and liquidity into the North Sea crude oil price marker.
View our latest infographic on the option of adding WTI to the basket.
- The Crude Report: The Brent basket’s burden
- The Crude Report: The Brent basket’s burden: Part 2
- Take the poll: The Brent basket’s burden
- Infographic: The Brent basket’s burden: More sour than sweet
- Infographic: Brent’s burden: From a land far, far away
James Gooder: Hello, and welcome to the latest edition of "The Crude Report." This is a weekly podcast from Argus Media, in which we try to illuminate the big issues in today's global crude oil markets. My name is James Gooder, and I'm the VP for crude in Europe and Africa. I'm very pleased to welcome to the pod for this transatlantic broadcast Amanda Hilow, who is the Associate Editor of Argus Crude based in Houston. "Hi, Amanda, how are you doing?"
Amanda Hilow: Hi, James, I'm doing great. Thanks for having me.
James: Good to have you with us. Now, in previous instalments, we've been looking at the liquidity problem facing the physical part of the Brent complex. That's the benchmark known as Dated Brent or North Sea Dated. Clearly, there's been a drop-off in production and more importantly, in liquidity and transparency in that market. So there is an increasing drumbeat of demand for more crude to be put into that basket to bolster the whole Brent complex.
Now, we polled our listeners on their preferred outcome, their preferred solution to this problem. And we examined the most popular option amongst those respondents. That was the inclusion of Norwegian grade Johan Sverdrup, which we found trades in a very similar way to Forties, Brent and Oseberg, etc. Though there are some quality issues, it's a heavier grade, and so on. Now we're back. We're looking at another popular solution, but one fraught with complications. That's the inclusion of US grade West Texas Intermediate, WTI, in the Brent pricing basket. Now, maybe we can just start off with the way the market is, not the way that the market ought to be, or could be in the future. Amanda, maybe you can just tell us how the WTI exports are currently priced?
Amanda: Yes. So, we first launched WTI fob Houston, or fob Gulf coast assessments in 2018. Liquidity and transparency really started to pick up in 2017. And we saw the market develop in a number of different ways. There's the primary market, which is at the fob Gulf coast, and that'll price as either a differential to the physical pipeline market - so, WTI Houston will often be a benchmark - and the other benchmark for that would be Ice Brent. Now, WTI also often trades on a delivered basis as it's quickly becoming a global crude. And one of the primary markets that we see is a delivered Rotterdam market. And on a delivered Rotterdam basis, it will trade as a differential to Dated Brent. The way that that structure works is WTI delivered Rotterdam will typically compete with North Sea grades like Forties and Brent, but the timing is a bit different. On an fob basis, WTI will trade about 15 to 45 days forward. So, we'll be seeing those cargoes trading in the market well before the pricing period for Dated Brent, which I understand is closer to 10 days to a month ahead. And then on a delivered basis, the timing will not always line up. On a delivered Rotterdam basis, we may see it start to trade in line with the North Sea grades like Forties.
James: Right. So, I mean, there's already that timing mismatch, and there has been talk in the past of a kind of virtual loading program in the North Sea to try and line those things up. But that hasn't really come to fruition. Maybe you can tell us about some of the other issues that the market will face, and price reporting agencies like us will face, when we think about integrating WTI into the Brent system.
Amanda: Two of the big concerns that we see are quality and cargo size. For example, on cargo size, the majority of the Brent grades will trade in a 600,000 bl cargo. That used to be a typical cargo size for WTI but due to infrastructure developments at the Gulf coast, the typical cargo size is now 750,000 bl. And we typically won't see a cargo lower than 700,000 bl unless it's going somewhere closer in proximity like Canada or Latin America. Now, on quality, there is some variation between the Brent grades and WTI. WTI, though, is a light sweet barrel, and it typically will range between 40 to 44° API with a sulphur content lower than 0.2pc. However, the gravity is a bit higher out of the Houston area than out of Corpus Christi, which is now covering the majority of US crude exports. And Corpus Christi will actually see that quality fall closer to around 41 or 42° API with the sulphur content trending closer to 0.1pc over the last couple years. The question is just that whether the quality will align with Brent. And if Brent maintains a cargo size of 600,000 bl, will there be any cargoes meeting that methodology in Europe?
James: Yeah, good questions. I mean, as you say, WTI is light sweet crude, and some of the issues that we hear in Europe are not necessarily that it's not good quality, it's just that the exact quality is not always known. So, there are things like metals content and things like that, that some of the European refiners are a little bit nervous about what kind of WTI they're going to get. But the Brent basket is actually slightly heavier. If you look at Brent, Forties, Oseberg, Ekofisk and Troll, the range there is 35 to 40 degrees API. So, a little bit heavier, and in quite a range on the sulphur as well. So, it's possible to integrate crudes of different quality into that basket.
But what we need is some kind of clarity, some kind of guarantee of quality, which isn't there yet, I guess.
My next question is about volume. Because while everyone knows WTI is coming out in significant volumes, it does vary. And as you said, it's a grade that can go pretty much anywhere. It's popular in Asia, as well as Europe. Is it possible to get, ahead of time, some clarity on how much of the WTI export programme will be coming to Europe in a given month, that's actually competing with the Brent-type grades? And when I say programme, does such a thing even exist at the U.S. Gulf Coast?
Amanda: So, there is a big push by certain price reporting agencies to launch a virtual program for WTI at the Gulf coast. However, I don't really see that as a feasible goal, at least in the near term. The way that the US loading programmes work is a different loading programme exists for each individual company and each individual terminal. A lot of those terminals are held privately. They are not public terminals, which means the transparency of those loading programmes is minimal. I've also seen these loading programmes tweaked all the way up until the time that these cargoes are loading. So, for an established programme to emerge, it will involve all of the US market participants coming together as one to change how the market actually works. Additionally, I don't think that if there was to be a loading programme developed at the Gulf coast, the timing would line up with the Dated programmes. The structure between these two markets is just completely different. And if WTI is trading on a fob basis at the Gulf coast, that means that it has options for deliverability. Like you said, it can either go to Europe or Asia. And often buyers don't know which direction they're going to go until they take a look at the arbitrage once the cargo has loaded. And this is especially true for international participants with assets in several regions.
James: Sure. I mean, for many years, one of the key arbs has been the WTI- Brent spread. But if Brent itself is being set by WTI, there's a certain circularity to that that might make it difficult to work out exactly where the WTI ought to be going. Another of the big issues that we see is that the forward contracts, this is a paper contract in the North Sea, it's known as SUKO 90, Forward Brent, or Forward North Sea. This is a way by which physical supply can be procured ahead of time, so you can buy a contract for October, and then when it comes to the time you get whatever is the most competitive grade delivered to you through that contract. A lot of the time it's Forties. I guess under this scenario, it could be WTI but you wouldn't know until near the time.
That requires a lot of consensus to be established, which is just not there between the different participants. I think it's fair to say that as we've gone through this process, we've seen some quite distinct camps with some companies being very much in favor of WTI coming into the Brent basket and others preferring to keep it at arm's length. Another question really is: there is this laser focus on all this stuff in Europe, Brent is obviously very important, Dated Brent feeds into Ice Brent which, as you say, is used as a benchmark around the world. And we have had, you know, these intense discussions particularly over this year, but how much of an issue is this in the US? Is the future of Dated Brent something that is of concern to the US exporters, do you think?
Amanda: So, the way that I see it is the majority of US participants that look at Dated Brent are looking at Dated Brent to calculate arbitrage. If they're trying to look for a liquid benchmark to price light sweet crude globally, mostly the US participants start to consider domestic grades instead. If WTI were to begin to price Dated Brent on a consistent basis, we might start to see a shift from Dated Brent as a benchmark to something like WTI Houston instead. Because if WTI is going to set the price for the Brent benchmark, then the way that US market participants see it is they're going to go to where the liquidity for WTI is. And our two most liquid WTI assessments are either WTI Midland, which is in the Permian Basin, or WTI Houston, which reflects Midland-quality crude delivered to the Gulf coast.
My understanding is that Dated Brent will see about a cargo or maybe two cargoes traded per day, where WTI Houston will trade multiple times per day, and throughout the entire day. So, it is always a liquid assessment, I can name one time in the history since we've launched WTI Houston that we didn't have a single trade. So, we might start to see some more WTI Houston showing up in global contracts, we might start to see a shift to WTI Midland, or maybe even AGS [American GulfCoast Select]. I will say, though, that the US participants, they are open to a change to Dated Brent. They do recognize that there is a problem with liquidity that needs to be addressed. But the sentiment that I get is that there are a lot of mechanics that need to be worked out. And if the way that those mechanics currently work favours a WTI benchmark to price the market, they would rather it be at the Gulf coast.
James: That's interesting. I mean, I guess a lot of this debate stems from the fact that pricing is already gravitating to the US Gulf Coast in terms of where the global balancing points of supply and demand are and where price discovery happens. And as you say, we've got these very liquid transparent benchmarks based on openly reported trade, places like Midland and increasingly Houston as well. And already people are using that to hedge their WTI exposure. So these instruments are in place.
This is a hugely complex issue. We're not going to solve it today. But any change that happens will favour some and disadvantage others, which is why this is such a knotty debate. And I think, as we heard earlier this year, when another price reporting agency, who will remain nameless, tried to change what was going to happen with their Dated Brent assessment and the amount of opprobrium, and complaints, and protest that came out of that, it strikes me that any change that happens is going to have to have a very long lead time. Because whatever you do to Dated Brent is going to change the value of that complex and all of the open positions down the forward curve may need to be renegotiated. So, it's going to be a very painful process. Here at Argus, we contribute to this debate by publishing different pricing options. You mentioned AGS. Maybe you could just explain to the listeners what that represents?
Amanda: Yes, so that goes back to more participants wanting a WTI benchmark at the Gulf coast. It really came into play after April 2020 when Nymex crashed below $0/bl due to financial participants being left in the market at the end of the trade month. A handful of market participants came to us saying: "Hey, we need a WTI benchmark, but we don't want it to be in Cushing. We don't want it to be landlocked. We want to be at the Gulf Coast." So what we do is we take WTI trading at 11 different terminals at the Gulf coast, and we merge them into a single assessment and offer you a daily outright price. But since it's in its infancy, we'll also price it as a differential to Nymex. So that way people have hedging options if they still want to include some Nymex element.
James: That's interesting. So, that essentially combines all that pipeline trade and some cargo trade as well.
Amanda: Yes, it's actually the first of its kind of assessment. We will take, I think it's five or six pipeline terminals, and then we have all the key fob terminals that WTI trades at as well. And we'll normalise them to the Echo terminal in Houston. That way, it'll reflect the same type of assessment every single day.
James: Perhaps, Amanda, as you say, it's early days, all these options are jostling for position at the US Gulf Coast, but that could be the kernel of a type of Dated Brent for the region in the future that amalgamates as much liquidity as possible at the US Gulf Coast. It certainly seems to me looking from Europe from the old world, if you like, that all roads are leading towards the US Gulf Coast in one way or another as the locus of price discovery in the future. Is that the way it feels over there too?
Amanda: Yeah, I definitely see the writing on the wall, and it's been a steady shift to a Gulf coast focus. First, it began with Nymex, then it began with Midland, and pricing, and transparency, and liquidity emerging out there. Then WTI Houston. Now we're looking at AGS. I think that market participants are basically trying to gauge all the possible ways that they can price WTI at the Gulf coast. I think that's where we are headed.
James: So maybe saving Brent isn't the answer, but maybe moving towards a new way of establishing a flat price benchmark.
Amanda: It will definitely be interesting to see how everything plays out.
James: No kidding. Well, I mean, here at Argus, we've been publishing something called New North Sea Dated for a couple of years now that shows what the effect of WTI inclusion in Dated Brent might be, or might have been, strictly speaking. And that shows that much of the time in Europe, if you had WTI in Brent, it would be setting the benchmark more than half of the time, and that the price would be lower, again, depending on the arb. And we've also been talking to the market about launching another illustrative index for Dated showing how Johan Sverdrup might be included. That's something that we'll be doing in the next couple of months. So, for now, please get in touch to share your thoughts on this issue. As I say, we're keen to take everybody's view into account.
We're painfully aware that Dated Brent is not just important for the North Sea or Europe. It's something that has global implications. And we have also made a commitment to continue to provide clarity in our own North Sea pricing to keep a North Sea Dated based on FOB trade in the North Sea if that's what people want, as well as, as Amanda described, shedding light on the market price of WTI at multiple points along the supply chain all the way from Midland, through Houston to the coast and then into Asia and into Europe. So, as you say, it's going to be a fascinating time. In the next instalment of this series, we're going to look at some of the other options on the table for Brent. But for now, thanks very much to listening to this edition of "The Crude Report." Thanks to Amanda for joining me, and we'll catch up with you again soon. Take care and thanks a lot.
Amanda: Thanks, guys.