The World’s Most Important Oil Price Is About to Change for Good

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After years of wrangling, the world’s most important oil price is about to be transformed for good, allowing crude supplies from west Texas to help determine the price of millions of barrels a day of petroleum transactions.

The shift is because the existing benchmark, Dated Brent, is slowly running out of tradable oil for it to remain reliable. As such, its publisher S&P Global Commodity Insights — better known by traders as Platts — has been forced to make a dramatic overhaul.

Its switchover was fraught with controversy and caused a lot of stress among physical oil traders. But it was necessary. BP Plc at one stage said that Dated Brent was subject to “increasingly regular dislocations.”

But the future of Dated is now set. From cargoes for June onward, West Texas Intermediate Midland, oil from the Permian will become one of a handful of grades that set the Dated benchmark.

Here’s a look at what matters as the transition gets closer.

1. Why does it matter?

Dated, as it’s commonly known by oil traders, helps to set the price of about two-thirds of the world’s oil and even defines the price of some gas deals.

Oil producing states will often sell their barrels at small premiums or discounts to Dated, so the precise mechanics of how it is formed matter to them. In addition, the benchmark lies at the center of a complex web of derivatives, ultimately shaping Brent oil futures that get traded on exchanges.

Dated affects a host of oil prices, so even crude in Dubai could feel the effects, according to Adi Imsirovic, a veteran oil trader and senior research fellow at the Oxford Institute for Energy Studies.

2. Exactly what’s happening?

Traders will be able to offer WTI Midland for sale from the US Gulf Coast. It will be delivered into Rotterdam and then price will be netted back using a freight adjustment factor as if it’s shipped from the North Sea.

By following a careful process, Platts will evaluate if the oil is being offered at a higher or lower level than five existing grades that set Dated — Brent, Forties, Oseberg, Ekofisk or Troll.

If Platts judges that WTI Midland is the most competitive price on offer — or actually sold — then it could set Dated.

So WTI Midland might then influence the price a seller of an Atlantic Basin barrel charges a refinery in China.

3. How will price discovery work?

Imagine the existing Dated grades, which go under the acronym BFOET, are at $80 a barrel.

A trader might pick up a cargo of WTI Midland at $79 from a terminal the US Gulf with $2 added delivery cost to Rotterdam — more than 6,000 miles and around 17 days sailing away.

Platts would need to make that delivered cargo like-for-like against the existing BFOET grades, which are transacted on a so-called Free on Board, or FOB, basis in the North Sea.

To do that, it will use what it calls a freight adjustment factor, deducting the estimated cost of transportation across the North Sea to Rotterdam. If that were to be $1 a barrel, then the implied FOB price of WTI Midland in the North Sea would be about $80.

The process will place an emphasis on Platts’s assessments of tanker costs.

4. What’s the timeline?

Some changes are already getting underway. In February, Platts began assessing forward prices based on the new assessment. Real cargoes of crude from the US will be allowed for inclusion from early May.

The expiry of the May Brent futures contract at end-March will rely on some trades of a June Brent exchange of futures for physical contract, which will take the changes into account.

Those key derivatives tools, along with the futures market, will determine the basis price of physical Dated Brent for June.

An important detail in the coming weeks is just how much trading of forward Dated Brent will pick up. So far, twelve entities have conducted transactions based on the new terms, according to Platts.

Ultimately these deals will define something called the Brent Index, a once-a-month price published by ICE Futures Europe that’s used for the cash settlement of futures.

“Without a forward market, there’s no way to financially settle the ICE Brent contract,” said Kurt Chapman, a veteran oil trader and ex-head of crude at Mercuria Energy Group, who retired in 2018 after almost three decades on the front lines of global oil trading.

5. Will the Dated be better?

Assuming traders take to the adjustments, it will be transformative in terms of the underlying volume of oil that can be transacted.

In March alone, around 60 tankers hauling around 1.8 million barrels a day of oil were expected to arrive in Europe, the highest since 2016, according to data compiled by Bloomberg.

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