WTI’s inclusion in Brent has immediate impact

Including US WTI crude in the North Sea Dated basket appears to have had the desired effect of boosting the benchmark's underlying volumes and liquidity. But concerns that WTI will overwhelm the Atlantic basin marker look well founded.

WTI crude has been included in the North Sea Dated basket as the sixth benchmark-setting grade from May. WTI was added to bolster the physical volumes underpinning the benchmark, given that North Sea production is in long-term decline. Loadings of the five benchmark grades Brent, Forties, Oseberg, Ekofisk and Troll averaged just 713,000 b/d last year, whereas WTI arrivals to Europe stood at 1.47mn b/d in April-May.

The addition of this much-needed liquidity has had an immediate effect. WTI dominated the afternoon trading window in May, with more than half of the deals, bids and offers seen in the window related to the US grade. And this is likely to continue in June, given that WTI also dominated the North Sea forward market last month. At least 19 cargoes of the grade moved through the forward chains process last month, compared with just one cargo of Forties and no cargoes of the other four grades. At least some of these WTI cargoes are expected to appear in the spot market in the coming weeks.

Participation in the forward market and the North Sea Dated process so far has been restricted largely to the usual North Sea benchmark market participants, with trading firms Trafigura and Vitol, and Shell, BP and TotalEnergies all appearing regularly. The return of US commodities conglomerate Koch to the forward market last month suggests involvement in the market may become more diverse.

But WTI has had an impact on the North Sea Dated price. The daily benchmark price is set by the lowest priced of the six grades. Freight-adjusted WTI was the cheapest of the six grades for 13 sessions in May. Forties — which was the cheapest of the grades 51pc of the time last year ― was the lowest-priced grade for five sessions in May, with Brent setting the benchmark once. None of the other grades affected the Dated price. As a result, North Sea Dated was on average 4¢/bl cheaper in May than it would have been without WTI, with the largest difference of 19¢/bl occurring on 22 May ( see graph ). This discount could widen in the future should WTI flows to Europe increase further. The inclusion of WTI in the benchmark in 2020-22 would have reduced the North Sea Dated price by 75-84¢/bl over the period, Argus data suggest.

Relationship issues There are also signs that the addition of WTI in North Sea Dated could result in a convergence of the two benchmarks. The spread between front-month Ice Brent and the equivalent Nymex WTI futures contract has narrowed in the past two months ( see graph ). The spread averaged $4.62/bl last year, peaking at $9.59/bl. It widened to $6.02/bl in the first quarter this year, but averaged $3.96/bl in April and May. And the relationship between the two contracts has become more stable. The daily change in the spread between the two averaged 57¢/bl last year, but this has narrowed to 20¢/bl so far this year. This raises the possibility that North Sea Dated eventually could be seen as merely a European price for WTI.

The relationship could become a function dictated solely by freight rates. Freight already is having an impact on North Sea Dated. On at least one occasion in May, WTI dropped below Forties to become the lowest-priced grade, despite the grade's assessment being unchanged, with the difference between the grades driven entirely by an increase in freight rates, which are deducted from the delivered WTI price. The growing importance of freight rates could become an unintended consequence of Brent's latest evolution.

Ice Brent vs Nymex WTI North Sea Dated vs Dated BFOET

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