After many years of negotiations, the world’s largest oil price has been changed. Crude supplies from West Texas will now be used to determine the price for millions of barrels per day in petroleum transactions.
Dated Brent is losing tradable oil, which is why the benchmark has been restructured. S&P Global Commodity Insights, better known as Platts by traders, has had to undergo a major overhaul.
The switchover was controversial and caused much stress among physical oil traders. It was necessary. It was necessary.
The future of Dated is already decided. The Dated benchmark will be set by West Texas Intermediate Midland’s June cargoes.
Let’s take a look at the most important things as we get closer to the transition.
Oil traders commonly call it date, and it helps determine the price for about two-thirds the oil in the world. It also defines the price for some gas deals.
The oil producing countries will often sell their barrels for small premiums or discounts to Dated. This is because they care about the exact mechanics of how it was formed. The benchmark is also at the heart of a complex web derivatives that ultimately shape Brent oil futures.
Dated has a wide range of effects on oil prices. Dubai crude oil could be affected, Adi Imsirovic, an experienced oil trader and senior research fellow at The Oxford Institute for Energy Studies, says.
WTI Midland will be available for sale by traders from the US Gulf Coast. It will be shipped to Rotterdam, and the price will be adjusted using a freight adjustment factor.
Platts will carefully evaluate if oil is being offered at a lower or higher level than the five grades that are set Dated — Brent (Forties), Oseberg (Ekofisk) or Troll.
Dated could be set if Platts determines that WTI Midland is either the most competitive or actually sold price.
WTI Midland could then have an impact on the price that a seller of an Atlantic Basin bar charges a Chinese refinery.
The current Dated grades, also known as BFOET, currently cost $80 per barrel.
WTI Midland cargoes might be picked up by a trader at $79 from the US Gulf terminal. There is a $2 delivery charge to Rotterdam. This adds more than 6,000 miles, and takes around 17 days to reach.
Platts would have to match the delivered cargo with the BFOET grades. These are transacted on a Free on Board (FOB) basis in the North Sea.
It will then use what it calls a cargo adjustment factor. This subtracts the estimated cost for transportation from the North Sea to Rotterdam. If it were $1 per barrel, the implied FOB price for WTI Midland in North Sea would be approximately $80.
This process will be centered on Platts’s assessment of tanker cost.
Some changes are already underway. Based on this assessment, Platts began to assess forward prices in February. From early May, real crude oil cargoes from the US will become admissible for inclusion.
Some trades on a June Brent futures exchange of futures for physical contracts will be required to determine when the May Brent futures contract expires at the end of March.
These key derivatives tools will, together with the futures markets, determine the basis price for physical Dated Brent in June.
In the coming weeks, it will be important to know how much forward Dated Brent trading will increase. Platts reports that twelve entities have already executed transactions on the new terms.
These deals will eventually define what is called the Brent Index. It’s a once-a month price published by ICE Futures Europe and used to settle futures.
Kurt Chapman (a veteran oil trader who was also the head of crude at Mercuria Energy Group) said that without a forward market there is no way to financial settle the ICE Brent contract. He retired in 2018 after nearly three decades of being on the frontlines of global oil trading.
If traders accept the adjustments, it will transform the oil market in terms of the actual volume that can be traded.
According to data, 60 tankers carrying around 1.8 million barrels of oil per day were expected to arrive in Europe in March. This is the highest number since 2016.In March, flows from the US Gulf to Europe set new records
The theoretical limit for Dated inclusion is 1,000,000 barrels per day of WTI Midland, but volumes will be minimal until trading of new Dated picks-up.
There are no two crudes the same, so Platts will eventually have to compare WTI Midland with other grades in BFOET.
It is said to be superior due to its density and high sulfur levels.
Some European traders are concerned that WTI Midland cargoes might not be as specified when they trade. WTI is actually a mixture of several crudes.
A flaw in an oil cargo, which was purchased or sold to set a global benchmark for underpinning prices worldwide, would cause a problem.
The US terminal operators claim there is nothing to worry about. According to them, the 11 terminals that will receive crude oil from Platts are able to guarantee consistent high quality to date.
The cargo sizes that can be included are another issue. They are 700,000 barrels too small to match the current US oil trading.
Supertankers have been flooding the Atlantic with 2-million-barrel cargoes. These would not be eligible for inclusion in the Dated.
The BFOET grades come with their own loading plans with each consignment assigned a unique identifier. This gives traders clear visibility into the oil supply. WTI Midland is not yet in this position, so there could be some uncertainty as to how many cargoes will be offered.