WTI crude futures swaps activity rose to a record Wednesday, spurred by a shortage of Russian crude, declining production in the North Sea and the upcoming inclusion of Midland-quality WTI into the North Sea Dated benchmark.
WTI Midland swaps on the Chicago Mercantile Exchange (CME) hit a volume of just over 26,000 lots yesterday, surpassing the previous high of just over 22,000 lots in a single day seen in September of 2018. WTI Houston volumes were even higher, coming in at just under 30,700 lots on 8 February, compared with a previous single day high seen in March of 2020 at a little under 21,400 lots.
The combined volume of over 56,000 lots for the two contracts is also a record. Both swaps settle on prices published by Argus.
In December, WTI Midland and WTI Houston swaps saw open interest of around 157,000 lots and 145,000 lots, respectively. Each lot represents 1,000 barrels, making those figures equivalent to 157mn bl and 145mn bl in open interest. By the end of January, open interest had risen to close to 180,000 lots for WTI Houston and nearly 170,000 lots for WTI Midland.
Daily average volumes also increased at the start of the year, with WTI Houston swaps reaching an average of around 8,000 lots/day in January and WTI Midland at about 3,000 lots/day on average for the month. The combined 11,000 lots/day average was nearly double the monthly average for 2022. Combined volume for the two swaps reached 18,000 lots on 10 January.
The surge in swaps activity comes on the back of rising Midland WTI flows to Europe, which in December were estimated to have exceeded 1.6mn b/d, up from about 1.3mn b/d at the start of 2022, according to Vortexavessel tracking data.
Increased US crude flows to European destinations come at a time when Russian flows into the region have fallen sharply as a result of import bans and price caps related to the war in Ukraine and as production in the North Sea continues to decline.
Production of North Sea dated benchmark grades, which peaked at the end of 2021 at about 1.6mn b/d for Brent, Forties and Oseberg combined, is now consistently under 1mn b/d, despite the addition to the basket of Ekofisk and later Troll.
The decline in volume backing the North Sea Dated benchmark led market participants to look outside of the region for additional volumes to bolster the liquidity behind the benchmark, resulting in a decision to include Midland WTI imports in the basket.
North Sea Dated will start including volumes of WTI Midland delivered into Rotterdam in June this year.
The addition of the US grade is expected to generate greater interest in WTI among European buyers. That view is supported by the recent rise in WTI-related swaps activity, most of which has been attributed to European players, including some who have taken forward positions well beyond June.
