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Brent to Eclipse US Crude as World Oil Benchmark


It has been coming for years, but Brent looks set finally to overtake U.S. light crude s the preeminent oil benchmark next year as one of the top financial market indexes switches weightings.

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Brent is becoming the hedge of choice for big investors, even for U.S. companies.

The volume of Brent futures and options has soared, boosting liquidity at the expense of the U.S. crude , also known as West Texas Intermediate, or WTI.

The widely followed S&P GSCI index marks this on Jan.1, raising its weighting for Brent and cutting WTI, following a migration by major oil producers and consumers.

Saudi Arabia and other producers have already moved away from the landlocked U.S. grade while oil refiners, end-users and hedge funds have gravitated towards the North Sea benchmark that they think tracks global risk more accurately.

"Can we all just forget about WTI?" Ian Taylor, the head of the world's biggest oil trading company, Vitol, asked an industry conference in London this month.

"It's no longer an international currency of any value whatsoever."

Average volume this year for Brent futures on the InterContinental Exchange (ICE) has overtaken WTI traded on the New York Mercantile Exchange (NYMEX) by more than 30,000 lots per day, exchange data show, with Brent at over 600,000 and WTI trailing around 570,000.

Combined volumes of the two exchanges still show WTI futures ahead in terms of volume and open interest, but Brent is closing and looks set to eclipse its U.S. rival early in the New Year.


Significantly, Brent options volume has rocketed.

Although the Brent options market is still only around a quarter the size of the WTI options market, ICE and NYMEX data show, Brent options volume has increased by more than 300 percent so far this year.

"Even U.S. mid-sized producers have begun switching from WTI to Brent in their hedging programs," said Jack Kellett, the head of oil at inter-dealer broker GFI Group .

John Kilduff, at hedge fund Again Capital in New York, says U.S. end-users are becoming more sophisticated, venturing into Brent because it more closely reflects oil product price moves.

"Brent is not yet fully embraced by companies solely with U.S. exposure, but the idea of Brent being the (grade with) true international exposure is gaining acceptance," Kilduff said.

A string of companies in the Americas have adopted Brent.

U.S. carriers Southwest Airlines and Delta have switched to Brent to hedge their exposure to jet fuel.

Colombia's Ecopetrol said last month it was moving the pricing basis for crudes to the North Sea grade and Trinidad state company Petrotrin and partners Bayfield have also said they will sell oil linked to Brent, dropping WTI.

The main criticism of WTI has been that it no longer tracks the international spot market as efficiently as Brent.

Growing U.S. and Canadian oil production has driven down the price of crude oil in the Midwest of the United States, where WTI is priced, and an inadequate pipeline network has made this problem worse, helping depress WTI prices versus Brent.

ICE Brent traded around $22.50 a barrel above NYMEX WTI on Tuesday and last week was at a $26 premium.

"Self-Fulfilling Prophesy"

The landlocked nature of WTI led the world's biggest oil exporter, Saudi Arabia, to drop the U.S. crude as the basis for U.S. sales in favour of a basket of Gulf of Mexico crudes.

The WTI futures contract is also at a disadvantage because of its price structure.

With the WTI front-month contract at an almost permanent discount to forward barrels, investors who track the contract are penalized by a negative roll-yield.

Each time the first WTI futures month expires, investors have to replace it with a more expensive later month.

But Brent has a positive roll yield, with the front month at a premium to later months, giving an easy profit for investors.

"WTI is in a permanent contango and many funds are trying to manage the roll exposure," said Kellett at GFI.

Brokers have seen a wave of volume coming into Brent and say the reallocation of weightings by the S&P GSCI will accelerate the process.

From Jan. 1, GSCI will cut WTI by 6.25 percent to 24.71 percent and raise Brent by 3.99 percent to 22.34 percent.

That still leaves WTI just ahead of Brent but will bring new investors that track the index including major funds.

"The shift in allocations by commodities indexes is probably the biggest driver for the switch to Brent from WTI," said Christopher Bellew, senior oil broker at Jefferies Bache .

"Many investors have to match the indexes."

Tamas Varga of brokerage PVM agreed: "The weightings will tip the balance even further. It is a self-fulfilling prophesy."