FEATURE: Dated Brent benchmark gets boost from inclusion of US crude

The world's most important oil price benchmark Dated Brent -- used to set prices for more than two-thirds of the world's traded crude oil -- is set for a major volume increase as Platts includes the US' WTI Midland grade, marking the biggest boost to deliverable crude cargoes into the key price marker in a generation.

The benchmark -- which owes its origins to the development of the North Sea in the 1970s -- also underpins billions of dollars in futures, options, and other derivatives trading. As a result, the volume of crude included in the physical Dated Brent basket is key to securing its longevity in a changing oil market.

The addition of WTI Midland to Dated Brent this month will see potential deliverable volumes jump above 1.6 million b/d, up from around 600,000 b/d currently, according to S&P Global Commodity Insights.

Platts -- part of S&P Global Commodity Insights -- first launched the Dated Brent assessment in 1987. As output from the UK's Brent field peaked, new crudes have been added to offset the declining production from the basin. The Forties and Oseberg crude grades were included in 2002 followed by Ekofisk in 2007. Troll was included in 2017. While production has stabilized in the North Sea, the five grades in the so-called BFOET basket are likely to see declines.

Typically produced from onshore US shale basins, WTI Midland is a light sweet crude, which aligns well with BFOET. It was chosen over Norway's heavier, higher-sulfur Johan Sverdrup crude as a better fit for the existing Brent basket after extensive consultation with the industry.

Oil majors actively trading Dated Brent contracts such as BP and Shell showed early support for the inclusion of WTI Midland into the benchmark through suggested amendments to the standard contract governing forward trades of the BFOET basket. Vitol -- the world's biggest independent oil trader -- was also an early backer of the changes. In 2021, Vitol CEO Russell Hardy said WTI Midland was a "pretty adequate substitute for many of the crude grades currently in the benchmark."

Speaking in April, Vitol's Asia head Mike Muller said the company had been trading the June Brent contract for many months and the market was well prepared for WTI Midland's inclusion in spot pricing.

"You now have a very large amount of Midland which adds to the pool of liquidity," Muller told the Gulf Intelligence podcast. "It does portend a little bit more stability in the benchmark. I think the market is ready for that and, on the whole, welcomes it because the deeper the liquidity, the more reassuring the benchmark is... particularly for people who want to put long-term trades on for inflation hedges or relative value trades in the financial sector."

US oil flows

The US has become a major crude supplier to European buyers after Washington opened oil exports in 2015, and flows gained pace after Russia invaded Ukraine. US crude exports to Europe have surged by some 700,000 b/d since February 2022, to average 1.92 million b/d in March this year, according to trade flow data from S&P Global Commodities at Sea. This made the US top supplier to Europe, with a 19% share of its imports, up from 11% at the beginning of the conflict.

With US shale output rising, physical flows of WTI Midland heading to Europe are expected to exceed 1 million b/d by 2025. However, not all WTI Midland cargoes will be included in the new assessment. Tanker sizes are currently limited to 700,000 barrels, bigger than most Brent blend shipments but much smaller than the 2 millionPlatts reflects WTI Midland cargoes in Dated Brent from May 2 barrel VLCC cargoes increasingly seen exported from the US Gulf.

WTI Midland export flows to Europe in Aframax tankers able to carry 700,000 barrels of crude have averaged some 240,000 b/d so far this year, according to S&P Global Commodities at Sea. Although VLCC cargoes can be lightered into smaller vessels once in Europe, the cargo swaps will also alter the price dynamics for exporters.

The role for WTI Midland looks even more prescient in the wake of Russia's 2022 invasion of Ukraine. Shunned by Europe, the surge in Russian crude exports headed to Asia looks unlikely to revert to the former East-West trade flow for the foreseeable future.

"This only strengthens the importance of WTI Midland crude in the European refinery diets and therefore in the Brent benchmark," Adi Imsirovic, Senior Research Fellow at the Oxford Institute of Energy Studies wrote in a recent paper on the future of Brent.

Price, quality match

While WTI Midland is close in quality to the light sweet North Sea grades, it also has a freight component that needs to be considered. It takes 17 days for a cargo to sail from the US Gulf Coast to the North Sea. A series of methodology changes have been made to account for differences such as the longer shipping times. As a result, the industry has agreed on a new standard contract to reflect the inclusion of WTI Midland, known as STASCO BFOETM 2022. The new contract replaces Shell's SUKO 90 General Terms and Conditions which has underpinned the Brent Forward contract for over 30 years.

Market participants have been trading the new terms for some months including trades of Cash BFOE "partials" -- which represents a portion of a physical crude cargo to be delivered in June.

WTI Midland has often traded at a lower discount to forward Dated Brent compared to the rest of the Brent basket. As Dated's value is set by the cheapest of the crudes in the basket, its inclusion could mark closer convergence of WTI and Brent pricing. The new assessment also includes a bigger freight adjustment factor (FAF) for WTI Midland to prevent US crude from dominating the basket.

Platts began assessing forward prices based on the new assessment in February and the first WTI Midland cargoes will be included in the benchmark from May 2. Dated Brent was assessed by Platts at $82.01/b on April 28, up from $79/b at the start of the year but 40% lower than the post-Ukraine invasion spike of $137/b in March 2022.

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