Will West Texas Intermediate (WTI) Replace Brent Crude As Global Benchmark?

The U.S. Energy Information Administration (EIA) recently estimated that Brent crude, the global benchmark, will trade at an average $2.74/bbl premium to West Texas Intermediate (WTI), the U.S. benchmark, this year. However, a Denver drilling services company CEO believes Brent’s status as the world oil price benchmark is facing head-winds, reports S&P Global Platts.

“I think that Brent’s time has come and gone and the market just hasn’t quite realized it yet,” said Dan Eberhart, CEO of Canary LLC. He added that the rationale behind Brent, not WTI, being the world’s benchmark is no longer applicable. North Sea output is declining, U.S. supply is expected to exceed a record 10 MMbbld in late 2018, and investment is now focused on U.S. shale.

“The U.S. is made up of many, many more oil fields than the North Sea and those fields are more dynamic and are seeing more investment,” Eberhart said. “I think the logic for why [Brent] was the benchmark has really eroded significantly in the last five years.” He outlined that the reason WTI never became the global benchmark was because of decades of restrictions on crude oil exports, which have since been eliminated. Further, if WTI replaces Brent it is likely the U.S. will be able to draw more investment.
Writing on his company’s website, Eberhart explains that in the 1980s, in order to simplify buying and selling crude in the international marketplace, and guarantee pricing transparency, the industry established benchmarks, a pricing reference point. The two primary benchmarks are Brent and WTI. Nearly 200 more lightly-traded references also exist.

Before 2011, Brent and WTI prices were closely aligned, with Brent prices typically trading at a slight discount, meaning WTI had a slim global advantage. In 2011 and 2012, however, a glut of sweet, light domestic crude similar to Brent overwhelmed takeaway capacity at U.S. storage facilities. The buildup put downward pressure on WTI pricing and the positions of the two benchmarks flipped: instead of WTI, Brent became the global oil price benchmark.

Eberhart points out that the four fields in the North Sea that constitute Brent crude are literally drying up. First exploited in the 1970s, they are mature fields where production fell from 420,000 bbldd in 2009 to 260,000 bbld in 2014. The fields have long been in decline, but now, with the price drop and WTI-related shale levels increasing, drilling projects beyond this year are also drying up.

(SOURCE: The Weekly Propane Newsletter, November 13, 2017)