The North Sea is enjoying a moment in the sun. Trading in Brent crude futures hit a record in June. In the second quarter, average volumes of London-traded Brent contracts eclipsed those of New York-traded West Texas Intermediate futures for the first time, according to Energy Intelligence.
New York-traded WTI still dominates on some measures, such as open interest. And, the numbers change if options are included, or WTI contracts traded in London are taken into account. But the shift in volumes in the most popular markets for the two benchmarks is significant.
In a sense, the futures are just catching up with physical reality: more than 60 per cent of the oil traded globally references Brent, according to Platts. With countries such as Vietnam and Malaysia ditching local benchmarks in favour of Brent-linked pricing, its influence on the global seaborne trade is rising.
Futures traders, however, have been reluctant to give up a tradition of three decades. The preference for WTI made sense as long as US demand swings were perceived to be the key driver of global crude prices. Besides, the WTI futures market was much more liquid than Brent. In any case, the prices moved roughly in tandem.
But the historical pattern broke down early last year. Booming US production and pipeline bottlenecks have stranded supplies and depressed prices at the WTI hub in Cushing, Oklahoma. The gap, which was typically less than $5 a barrel in normal times, with higher-quality WTI selling at a premium, today stands at about $18 a barrel in favour of Brent.
Traders who care about pipeline construction at Cushing might still want to work WTI. But for those wish to hedge against Iranian sanctions or bet on a Chinese hard landing, Brent futures make more sense. Passive investors are also switching as WTI futures’ low prompt prices relative to second month prices make it expensive to roll over positions, according to Energy Intelligence.
Brent isn’t perfect. Its prices regularly detach from global fundamentals as seasonal maintenance disrupts supplies, and Brent is unusually exposed to demand from South Korea, thanks to a free trade pact. However flawed, though, it is now preferable to the alternative. Brent futures’ ascent is unlikely to reverse anytime soon.