US Crude to Dominate Brent Oil Benchmark Under Index Change

(Reuters) — Texas crude is set to assume a key role in the world's most important benchmark — Brent — as oil-index publisher S&P Global Platts adds U.S. WTI Midland crude to its dated Brent oil price assessment for June deliveries.

Dated Brent is a part of the wider Brent complex including physical cargoes, swaps and the Intercontinental Exchange (ICE) futures contract. Brent is used to price over three-quarters of the world's traded oil.

WTI Midland is the first crude from outside of the region to be added to the basket. Until now, Brent had been based on five British and Norwegian North Sea crudes, whose supplies are in long-term decline.

"Bottom line for Brent is that it will be much more influenced by U.S. fundamentals such as Strategic Petroleum Reserve releases and Permian production," said Rebecca Babin, a senior energy trader at CIBC Private Wealth US.

The volume of WTI Midland crude arriving in Europe from the top U.S. shale basin has climbed in the past year, replacing Russian crude barred by Western sanctions.

The flow "only strengthens the importance of WTI Midland crude in the European refinery diets and therefore in the Brent benchmark," trading veterans Adi Imsirovic and Kurt Chapman wrote last month.

Dated Brent's value is set by the cheapest of the crudes in the basket. If WTI Midland had been a part of the Brent benchmark in 2021, it would have set the price about 68% of the time, said James Gooder, a vice president at commodity market data provider Argus, which competes with S&P Global.

"What we're seeing is a kind of merging of the two key benchmarks in crude," he said.

More Brent Volatility?

WTI Midland exports to Europe hit 1.25 million barrels per day in March, according to data provider Kpler, greater than the other five dated Brent grades combined.

Price volatility in Brent contracts could be higher than previously because there can be large month-to-month differences in how much WTI is delivered to Europe, said Christopher Haines, an oil analyst at research consultancy Energy Aspects.

"We need to see a couple of months of trade in order to actually see how that plays out," he said.

WTI's inclusion in dated Brent will affect the arbitrage, or the price of crude at different locations that determines the economics of buying and moving particular crudes, because Brent is widely used to price other grades, such as Dubai, analysts said.

"The WTI/Brent spreads have been tightening as the date of inclusion approaches and I expect that trend to continue," CIBC's Babin said.

Only cargoes of WTI Midland delivered on Aframax ships, which typically move about 700,000 barrels of oil, will be included in dated Brent.

The arbitrage "is all going to be about the Aframax freight rates" for U.S. exports to Europe, said Energy Aspects' Haines.

Hedging Gains

WTI Midland's inclusion in dated Brent has prompted more hedging activity, with traders uncertain about how demand and prices will change for dated Brent and WTI Midland.

Contracts for WTI at Houston and at Midland on the CME Group exchange have traded as far ahead as December 2026, CME said.

Open interest across the Midland and Houston contracts reached a record 432,193 last Friday, with combined average daily open interest up 56% from last year.

Oil majors have been buying the spread between WTI and Brent ahead of the change to manage any risk after Midland's inclusion comes into effect, a broker said.

Thomson Reuters competes with S&P Global Platts in providing news and data about the oil market.

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