crude pricing for the new oil fundamentals

CRUDE PRICING FOR THE NEW OIL FUNDAMENTALS
IMPLICATIONS & OPPORTUNITIES
May 2013
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2
WELCOME: CRUDE PRICING FOR THE NEW OIL FUNDAMENTALS
TODAY’S SESSION
Mike Davis - Director of Market Development, ICE Futures Europe
Content
 Introduction: Contexts, ICE role in crude and benchmarks
 The fundamental changes taking place in global oil flows and balances
 Consequences for oil markets and benchmarks
 How ICE contracts are responding to the changes
 Q&A
Key take-aways:
 Oil flows and markets are in a period of dynamic change
 Commodity futures benchmark performance and reliability is closely related to the infrastructure
of their underlying physical market
 Durable and strong benchmarks evolve with underlying physical markets
 Market views on benchmark‟s rationale and role – what problems asking us to help with?
 Water-borne contracts best fulfil the rationale for global benchmarks
 ICE benchmarks are positioned to align with and adapt to the changes
3
ICE: COMMODITY & DERIVATIVE MARKETS
ICE Regulated Futures Exchanges
U.S. & CANADA
AGS & ENERGY
FINANCIALS
Currency Pairs
Cocoa
U.S. Dollar Index
Coffee
Russell Indexes
Cotton
Sugar
Orange Juice
Barley
Canola
Wheat
Corn
Soybeans
North American Nat Gas
North American Power
EUROPE
ENERGY & FERROUS
METALS
Brent Crude
Brent NX Crude
WTI Crude
Gasoil
Low Sulphur Gasoil
ASCI Crude
Refined Oil Products
Natural Gas Liquids
Liquefied Natural Gas
European Natural Gas
U.K. Electricity
Coal
Emissions
Iron Ore
Freight
ICE OTC
ICE Data & Services
OTC CONTRACTS
MARKET DATA
OTC Credit – Creditex
CDS – Indexes, Single
Names, Structured Products,
Sovereigns
OTC Energy – Physical
Energy Contracts
BRIX – Brazilian Power
Markets
Real-time Prices/Screens
Indices and End of Day
Reports
Tick-data, Time and Sales
Market Price Validations
Forward Curves
SERVICES
WebICE & ICE Mobile
ICE eConfirm
ICE Link
ICE Chat
ICE Match
Chatham Energy
Coffee Grading
Trade Vault
Global Clearing Houses
ICE Clear U.S., ICE Clear Canada
ICE Clear Europe
Integrated Markets, Clearing and Technology
4
ICE Clear Credit, The Clearing Corp
BACKGROUND: GLOBALLY RELEVANT OIL MARKETS
ICE BRENT & GASOIL
ICE Brent and Gasoil Facts:
 ICE Brent and Gasoil are the world‟s largest in their respective fields
 ICE Brent is now the worlds largest oil futures contract – 2012 ADV



was 620,373 lots
(record of 1,221,902 lots 23 June), versus CME WTI‟s 555,461 lots
ICE Brent has been the largest oil futures contract since March 2012
Since Feb 2013 ICE Brent has traded more than both WTI contracts combined
Annual volume stats are as follows:
Yearly ADV (Lots)
ICE Brent
CME WTI
2010
386,779
658,841
2011
532,731
683,185
2012
620,373
555,461
2013 YTD
666,321
584,174
 ICE Gasoil has been the largest product future since 2005, also around the combined size
of its two immediate competitors
5
CRUDE PRICING AND OIL FUTURES
WHAT DO HEDGERS, TRADERS AND POLICYMAKERS NEED FROM REFERENCE PRICES?





Importance of oil futures, central to price discovery along curve, core global economic marker
Traders, hedgers and benchmarkers are looking for the (global?) oil price in real-time
Driven by global macro supply and demand, ideally non-local physical factors prevailing
Oil is an arbitraged matrix price searching for equilibrium, when no infrastructure bottlenecks
Spot crude prices at the margin (volatility and inelasticity) and up from refined physical products via
medium of competitive refining landscape, not down to products from the crude price – when
economics fail, refineries close or are sold off - derivatives discount where spot is going
 Waterborne futures contracts deliver:
 a globally-relevant „equilibrium‟ price
 the arbitrage function aligns global crudes with internationally arbitraged refined products markets in
highly competitive refining markets
 the oil industry (and most traders including „speculators‟) will concentrate on differentials across/to
crudes/products, not flat prices (thereby mean-reverting any temporary anomalies); margins and
spreads drive trading
Which price?
 Most oil is bought/sold on a (monthly, or longer) average price basis, not generally spot
 Very little oil was bought above $130 or then below $50 later in 2008
 The measurement issue - price shifts in Euros, Yen or against Gold look very different
 (Crude) Oil is not a homogenous commodity
 Light sweet crudes are the benchmarks, most crude is heavier and sourer (and cheaper)
6
OIL PRICING BASICS
 Price benchmarks do the „heavy lifting‟ for oil price discovery, enabling other





7
grades to be traded in reference to the most liquid flat price instruments,
providing security and liquidity to the whole
95% of oil is sold on an unknown forward average price suiting all parties
Spot physical trade only represents around 5% of the total; remainder is
contract or „term‟ pricing on a monthly average typically
Price is a key driver to producers, refiners and end-users, deciding whether
fields are explored, developed or closed down; refineries built/ sold
Price reporting agencies help to re-fix those floating average prices, risk
management tools enable values to be discovered, tested and secured
Modern risk tools like screen-based futures provide price discovery in flat price
terms and potentially exact hedges for all physical types of oil
WHAT MAKES A (ROBUST/NEW) BENCHMARK
 It solves a (pricing) need or problem
 It is accepted as a regional or global aggregator of price/quality
 It is located in a suitable jurisdiction in legal, regulatory & tax terms
 It is openly traded, not destination limited or bottlenecked in infrastructure
 It has a diversified community of sellers and buyers
 It has a critical mass of production or supply
 It has a sufficiently standardised physical trading contract regime
8
CRUDE BENCHMARKS: HOW DOES THE MARKET USE THEM
WHY DO THEY MATTER?
 Their power comes from the degree that their price is leveraged for other prices, be that
for other physical grades‟ or derivatives‟ prices
 Benchmarks are visible and identifiable because they are traded or quoted openly, and
relatively frequently on an outright or „flat‟ price basis
 They represent the core or „baseline‟ price of crude oil regionally or globally
 They possess the deepest liquidity pools, most advanced forward maturities in tenors,
and geographical dispersion of usage in pricing terms away from their core benchmark
location
 Tradable crude quality basis, geographical basis, and product „cracks‟ can then be
„sliced and diced‟ by tenor and towards less-liquid differentials
 Benchmarks are critical in providing transparency and price discovery
 For most of the worlds grades, and even Asia‟s choice of Dubai, which leans on the
Brent outright price, Brent is the core, proxy for most of the outright price
 For ESPO, Dubai so far done similar job, although Brent also has a related forward price
discovery role
 ICE Gasoil a comparable role for distillates, especially in deferred maturities
9
ICE BRENT: THE GLOBAL CRUDE BENCHMARK
LONG-TERM TRENDS
What trends can we identify?
 Brent the global physical standard, growing in
Asia and LATAM esp. Up to 70% of global
international physical pricing references Brent


Liquidity growth in existing sweet futures
benchmarks, benchmark longevity/inertia
Pricing relevance moving West to East, meaning
Brent cargoes tend to trade further out along the
curve

New complex refining/upgrading capacity
favours seaborne, not pipeline US domestic
landlocked grades

European distillates now major price driver of
refining margins, keeping sweets in Europe




10
Relative decline of gasoline and FO destruction
on upgrades
WTI still an important US (financial) benchmark
But price dislocation issues continuing in 2013 &
worsened in 2012 – pipeline bottlenecks and
storage constraints gradually adjusting
Brent, ASCI, LLS and others now more relevant
in US for physical pricing, growth of US Gulf‟s
significance, fwd significance
Long term success of ICE Brent Futures
(3 Month Rolling Average)
Lots
1,600,000
ICE Brent Open Interest
1,400,000
1,200,000
ICE Brent Average Daily Volume
1,000,000
800,000
600,000
400,000
200,000
0
Market Share of Major Oil Benchmarks
ICE Brent Volume
ICE WTI Volume
NYMEX WTI Volume
100%
80%
60%
40%
20%
0%
FUTURES CONTRIBUTION TO TRANSPARENCY, PRICE DISCOVERY
Increasing role of futures in benchmark price discovery
 Are acting as spot proxies, some decline in spot liquidity, futures/physical linkage critical
 Futures represent the „gold standard‟ in transparency, regulatory monitoring at all levels and liquidity
 Operational and logistical bar to market is less onerous
 Futures near 24/7 trading, liquidity means rapid response in price discovery
 Futures markets forward tenors discount the likely duration of fundamental trends and changes
beyond the short-term reach of near-term spot markets 4/6 weeks out
 Convergence via delivery mechanism or EFP relationship ensures primacy of fundamental factors in
price determination, whether global or localized fundamental factors
 Spot assessments have used futures +/- differentials or seen the creation of synthetic futures-like
instruments to enable assessments, e.g. in Platts‟ case, via partial cargoes
Examples:
 Crude: Futures +/- EFP = Forward +/- Diff‟l (CFD) = Spot
 Dubai partials a synthetic convertible forward, PRAs also use swaps/futures as part of physical price
discovery process, and to test expressed values in relational pricing
 Products: Futures +/- EFP Diff‟l = Spot Outright
 Gasoil futures + EFPs provide price matrix for all EU distillates and many globally
11
ICE FUTURES EUROPE:
THE BRENT CRUDE FUTURES CONTRACT: CRUDES THAT PRICE BRENT- RELATED WORLDWIDE
THE ICE BRENT CONTRACT IS A
GLOBAL BENCHMARK FOR OIL
WTI/ASCI
UK and Norway
Brent
Forties
Oseberg
Ekofisk
Flotta
Foinaven
Gulfaks
Brent
Russia and FSU
Urals
Siberian Light
Azeri Light
Med crudes
Suez Blend
Algerian Light
Es-Sider
Brega
Nigeria, Angola
Congo
Global crude benchmarks
• Dubai and ICE Brent
• ICE Brent
• WTI and ICE Brent
• WTI
•
•
•
•
12
Bonny Light
Brass River
EA
Escravos
Forcados
Qua Iboe
Cabinda
Hungo
Nemba
N‟Kossa
Arab Gulf (West-Bound
sales)
Arab Light
Burgan (Kuwait)
Iranian Heavy
Iranian Light
Sudan
Dar Blend,
Nile Blend
Vietnam and Australia
Cossack
Bach Ho
Minas
Dubai
As much as 70% of the world‟s internationally traded oil prices directly or indirectly off the Brent complex
Our contract is the key component of that complex
Financially-settled against Brent Index, ultimately deliverable via EFP mechanism
US product cracks to Brent and Malaysia, Brazil and Colombia join the Brent pricing community in 20102012
BRENT BENCHMARK INNOVATION ENHANCES LIQUIDITY
BRENT MOST LIQUID GLOBAL PHYSICAL MARKER - NORTH SEA TOTAL LOADINGS 2008-2013
kbpd
3,500
3,000
Thousands Barrels per Day
2,500
2,000
1,500
1,000
500
0
Data Source: Bloomberg
13
North Sea Crude Loaded
THE ICE BRENT COMPLEX
Brent
Swaps:
Calendar May First line
Calendar April First line
Cal. June
Futures „roll‟
Intermonth spreads
Daily Settlements
vvvvvvvvvvvvvvvvvvv
ICE
Brent:
May futures
Dated-frontline
(DFL)
Cash
Brent:
May
EFP
(Exchange Futures
June futures
July futures
June EFP
July EFP
for Physical)
May cash
June cash
July cash
Weekly Brent CFDs
Spot
Brent:
Dated
Brent (Spot
cargoes)
Dated Brent: Constant maturity 10-27 days
To 1H April
14
To 1H May
To 1H June
CHANGES TO NORTH SEA CRUDE MARKETS
 Major programme operators, equity buyers, price assessors:
 Brent markets increasingly globalised as Benchmark grows across 5 continents timings no longer reflect just a short-haul North Sea market
 Assessors moved to a 25-day basis for Dated and Cash BFOE in January 2012
 „Quality Premiums‟ to Forties introduced for Oseberg and Ekofisk cargoes by industry
and assessors from June 2013 cash contracts
 Use two-monthly „look back‟ of assessed BFOE grade differentials - weighted 66.6/33.3% respectively for M2/M-3 respectively, half of assessed premium
 Considering adding DUC and Troll - up to additional 600k b/day (or Statfjord) - take
complex over 75 cargoes/month (max .75 in 2007, c. 56-59 in 2011)
 Implementation of a change to a month-end nomination process in March 2015
 ICE Brent NX Futures and Options
 expiry calendar on 25-day basis
 trades in parallel with existing Brent Crude Futures Contracts
 Already embedded March 2015 month-ahead basis
 ICE reviewing transition progress during 2013
15
CHANGES TO NORTH SEA CRUDE MARKETS
 ICE
consultation on proposal to align transition to ICE Brent NX with
month-ahead timing in March 2015 onwards:
 Circular of 2/5/2013 launches consultation on ICE Brent to NX futures and options
transition measures effective 2013-14:
https://www.theice.com/publicdocs/circulars/13068.pdf
 Proposals to introduce Transition Limits for ICE Existing Brent futures and options
only, for contract months of March 2015 and later, effective October 1st 2013
 Limits of 5000 lots in Dec 2015, Dec 2016, Dec 2017 contracts
 Limits of 1000 lots apart from that in March 2015 and later contracts
 Delta-adjusted for options positions as applied elsewhere
 Possible exemptions, for positions established pre May 2nd in particular
 Market participants invited to provide formal and informal feedback to end-May 2013
 No limits in ICE Brent NX; month-ahead timing already embedded in ICE Brent NX
contract expiries from March 2015
 ICE Brent indices‟ methodology and timing unchanged
 Subject to industry feedback and possible further review
16
CRUDE BENCHMARK PRICING IN 2008-2013
BENCHMARK BEHAVIORS
The WTI inversion to Brent and the rest of the global
crude complex
 Increasing light sweet output from Canada, North
Dakota, and Eagle Ford
 The growing importance of the US Gulf coast – 1st
time became a refined product net exporter in 2H‟11,
processing non-WTI priced crude
Big 3 oil plays – Bakken, Eagle Ford Shale, Permian Basin –
are the key drivers of US oil growth
Annual crude oil production from key US plays, 2010-17E, mbpd
Source: EIA, Goldman Sachs Research estimates.
US domestic crude prices are subject to
considerable uncertainty:
 US legislative constraints prevent crude exports, will it
be allowed in the future?
 Pace of debottleneck pipelines from Canada and from
Cushing to Gulf Coast:
 Seaway; Magellan Longhorn; Sunoco Permian Express;
West Texas Gulf - 850 kbpd in total approx.
 TransCanada Gulf Coast Project (Keystone XL southern
leg) – 700 k bpd end of 2013
 TransCanada Keystone XL Northern leg 700 kbpd Q4
2013?
 Northern Gateway, aiming heavy bitumen to Pacific and
Asia, est. start-up 2017?
 KM Trans Mountain expansion to 890 kbpd?
 TransCanada Mainline conversion?
 PADD II refinery runs – as this will determine
domestic crude intake
But the reliance on Light Tight Oil
(LTO) for US/Non-OPEC production
uplift is considerable...
 Political environmental factors
 Macro economic trends
17
Source: EIA
CRUDE BENCHMARK PRICING IN 2008-2013
US SHALE OIL AND ITS IMPLICATIONS FOR PRICING BENCHMARKS
Break-through in 2012:



North American oil sands and light tight oil drove
unprecedented annual non-OPEC supply - 1.1 m bpd yo-y increase in Q4‟12
Yields per well increasing as drilling becomes ever more
focused and expert
Not only Bakken, Eagle Ford, but also Permian Basin,
Colorado, Oklahoma
Production Outlook for
Barnett Shale through
2030- absence of classic
production ‘plateau’
Will Shale be a ‘Game-Changer’?





Lesser initial yield from some of the most recently
exploited wells – „sweet spots‟ not the whole story
Inconsistency of quality of liquids: varies 42-60 API
Not be able to address the global requirement for
conventional light sweet – shale oil yields towards
NGL/Naphtha, rather than in-demand light distillate
Rapid inherent decline rate & continuous drilling
requirement- very different from conventional reservoir
Focus shifting from supply to demand issues/Gas
Source: Bureau of Economic Geology/University of
Texas at Austin; Husseini Energy
Refinery Yield on Changing Slate
USGC LLS vs. Eagle Ford Blending
LLS Yield
26.4
23.47
Implications on oil pricing benchmarks:



18
WTI/Brent Spread Cal 2015-18 vs. Cal 2013-14?
LLS/Brent Spread – Eagle Ford is occasionally sold
referenced to LLS
Approval of Northern Gateway pipeline may eventually
enable Canadian heavy to compete in the oil-hungry
Asian sphere – away from the infrastructure congested
and often discounted US oil pricing
Eagle Ford Yield (API 46 on Avg.)
27.3
24.21
21.08
16.58
13.63
12.411.93
7.58
2.54
7.2
4.47
1.13
LPG (C1- Light
Heavy Kerosene Diesel
VGO
C4)
Naphtha Naphtha
(C5+)
Source: Platts
Residual
Fuel Oil
CRUDE BENCHMARK PRICING IN 2008-2013
BENCHMARK BEHAVIORS
WTI issues raised by commentators:

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19
Cushing delivery location primarily a pipeline
nexus, no proximity to US Gulf refiners, added
Seaway pipeline expansion, total take-away
capacity Q2 2013 @825k b/day
Global Sweet / Sour Spreads 2010 - 2013
The Global Sweet/Sour spreads
- WTI, LLS, Mars and Brent versus Dubai
Self-feeding „reinforcing feedback‟ of local
inventory, grew to record 51-mil/bbl (April 2013)
to capture contango arbitrage, currently falling
One-way „lock-in‟ effect of pipelines inward flow
North; Cash & carry arbitrage supply loop easing
Extreme volatility of front spreads, pulling front
flat prices down & up
Depth of contango overall and instability of term
structure problematic for all but nimblest traders
or those with ample storage
All this led to WTI decoupling from US & Int‟l
grades, MARS $21.89 above WTI, LLS
$23.58/bbl above (March 21, 2013), WTI up to
$20.79 (March/April 2013) below Brent – where
does that leave differentials and cracks?
Dislocation narrowed post the Seaway reversal
and other infrastructure, but remains volatile,
curve flattened towards LT arbitrage costs
14
11
8
5
Prices in $/bbl

2
-1
-4
-7
-10
-13
-16
LLS/Dubai
Brent/Dubai
WTI/Dubai
-19
Dubai
-22
Mars/Dubai
-25
Sources: ICE, Argus Media Limited, Platts
HOW GLOBAL OIL MARKETS WORK: KEY FLOWS
CURRENT & EVOLVING PATTERNS
Source: JBC Energy
estimates Flows > 500,000 bpd displayed
Crude Flow Major Shift:
•US and Canada growing producers
• Crude US north-south focus incl. ‘tight’ oil
• Canadian crude in larger volumes into US
• Arab Gulf crude - most east to Asia, not US now
• (West) Africa exporting to Asia, rather than US
• Russian crude and products increasingly to east
20
Products Flow Major Shift:
• Distillates the high margin, growth part of the barrel-50%
• US Low Sulphur distillates to Europe
• EU demand falling, but LS distillate demand growing (weak refining sector)
• Asian swing consumer (refiner): LS distillate to EU (esp. India)
• High sulphur EU distillate to Latin America & W. Africa
• EU gasoline to W. Africa /Latin America
CRUDE BENCHMARK PRICING IN 2008-2013
BENCHMARK BEHAVIORS
The WTI inversion to Brent and the rest of the
global crude complex
 The two crudes are geared towards very different
product slates:
 US 50% Gasoline (20% Distillate)
 Europe 45% Distillate (15% Gasoline)
US domestic crude prices are subject to
considerable uncertainty:
US conventional gasoline demand is falling for a
number of reasons, now at a 12-year low of 8.877-mil
bbl/day for summer 2013 forecast per EIA; longer term
forecasts are now discounting a general fall in liquids
from any source (see chart bottom right)


Americans are driving fewer miles

Ethanol (E85 - 85% Ethanol, 15% conventional
gasoline) is cheaper and impacting consumption of
crude-sourced conventional gasoline

The US has a Gas glut which may encourage the
use of CNG or other propulsion alternatives to
relatively expensive oil alternatives

Exports to Latin America and other locations are
relieving some of the Gasoline excess
21
Source: EIA, JBC
Energy GmbH
US vehicles are far more fuel efficient than they
used to be
Source: EIA
GLOBAL SWEET & SOUR CRUDE BENCHMARKS IN 2008-2013
BENCHMARK BEHAVIOURS
22
ICE WTI/Brent Futures Spread - 5D Avg.
WTI/Brent Spr Front Month
WTI/Brent Spr Dec14
5
0
-5
-10
$/bbl
WTI disconnected from Brent and the rest of the
global crude complex
 WTI‟s discount to Brent (front month) widened
to record level of -$27.88/bbl in Oct 2011,
although subsequently narrowing, below $9/bbl
at front.
 WTI/Brent Dec 13-16 „boxes‟ flattened to $23/bbl since July 2012.
 Recent WTI/Brent pressure is more seen at
front than deferred
 Cushing stocks still 50M+ bbls (March 2013).
Will WTI/Brent spread narrow given new pipeline
& rail capacity completions?
 Flows take time to attain capacity and refinery
outages can see renewed stock builds
 Railway capacity is expected to grow from 400
kbpd to 700 kbpd this year, which partly will feed
into pipeline system - not totally additive to
Seaway
 Most new and highly variable flows may end up
via rail transportation, @$7-10/bbl, not
discounting a return to near parity
 Refinery mismatch will keep US importing heavy
sour to blend with light tight oil
 General waiver of US crude export ban/Jones
Act repeal looking unlikely so far
-15
-20
-25
-30
-35
Seaway pipeline reversal
announcement and Cushing
stock drawdown narrowed
WTI/Brent spread
Seaway Pipeline
capacity extended
to 400 kbpd
CRUDE BENCHMARK PRICING IN 2008-2013
BENCHMARK CRUDE BEHAVIOURS, IMPACT MATRIX OF OTHER PRICES
Did US refining margins/demand
suddenly improve relative to
Europe in Dec 2010/Jan 2011?
 Generally, no - reliance on WTI for
relative price signals like product
cracks can also be impacted by its
relative
price
dislocation;
price
mechanism signals important for
investment & refining decisions,
putting oil on the water etc, storage
 Transatlantic sweet arb.
structurally defunct for now
may
be
 Look at the relative volatility in the US
distillate
crack
relationship
–
contributing to more interest in forward
trading of sweet LLS and sour Mars
grades in the US Gulf
 Seaway reversal or other pipeline
changes may not eliminate US
„glutting‟ tendency, „magnetic‟ pull of
storage still there..?
23
$/bbl
50.00
Product Futures Cracks - Front Month Close
(5-D Avg.)
NYMEX Heating Oil Crack Spread (vs. WTI)
45.00
ICE Gasoil Crack Spread (vs. Brent)
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
Did US distillate refining margins/demand
suddenly improve relative to Europe in Dec/Jan
2011?
Source: Reuters
GAS: DIVERGING EAST/WEST FUNDAMENTALS & PRICES
THE NATURAL GAS PARADIGM - DIFFERENTIALS AT THEIR EXTREMES
$/ MMBTU
UK NBP
9.37
UK NBP
9.37
Source: Platts/ICE
24
GAS: DIVERGING EAST/WEST FUNDAMENTALS & PRICES
THE NATURAL GAS PARADIGM
JKM, NBP and Henry Hub Prices in $/MMBtu
JKM in $/MMBtu
NBP in $/MMBTU
Henry Hub in $/MMBtu
$25
$/MMBtu
$20
$15
$10
$5
$2007
25
2008
2009
2010
2011
2012
2013
GLOBAL FUNDAMENTALS IMPACT BENCHMARK PERFORMANCE
* non-OECD
Source: IEA
 Accelerated eastward shift of global oil flows
 Local demand contraction in Europe and US, and lost
refining capacity across EU and US East Coast.
 Total oil demand in Non-OECD exceeds OECD in 2014;
Distillates drive global demand growth
 Additional refining capacity in Asia and Middle East;
Long-haul product trade is on the rise
 US has already become a net refined products exporter;
huge refining upgrade in Russia, in line with the more
stringent domestic fuel quality requirement.
 Upward US shale oil supply offset low production from
non-OPEC supplies outside North America
26
Top Contributors to Non-OPEC Supply
(2011 - 2017)
Europe -0.7
Middle East -0.5
Mexico
-0.3
Other Asia
-0.3
East Europe
Total Russia
Pacific
Other Latin America
Other FSU
Africa
Processing Gains
China
Global Biofuels
Brazil - Total
Canada
USA
-1.0
0.2
0.2
0.4
0.5
0.8
1.1
3.3
0.0
Source: IEA - Medium-Term Reports
1.0
mb/d
2.0
3.0
4.0
DUBAI / OMAN & ESPO: AN EVOLVING CRUDE MARKET IN ASIA
Dubai/Oman pricing:
 OSPs use a number of factors to establish differentials to key pricing elements
 Underlying Dubai benchmark has been modified to include Oman and Upper Zakum as
alternative delivery crudes in the forward market, may see further evolution/inclusions
 Preference towards swaps - Dubai flat price and I/M swaps crucial to establish forward
curve, and part of assessment system that prices prompt physical Dubai also via partials
trading
 Price Assessors use Dubai swaps +/- Dubai/Oman spread and Oman spot diff depending
on whether going for partials only (Dubai) or Oman – (If want full physical cargo can
supply Oman/UZ into Dubai buyer, or UZ into Oman, not Dubai into Oman buyer
 Linked to sweets via Brent/Dubai (Derivative) spread markets
 Pragmatism and inertia are powerful factors here also
 Dubai flat price and spreads showing generally predictable relative pricing behaviours on
economic yields and fundamentals (See global sweet/sour differential chart previously)
27
28
DUBAI: PRICE ROBUSTNESS, BENCHMARK SUSTAINABILITY
DUBAI LIQUIDITY GROWING
Dubai/Oman pricing:
Destinations of Selected Crude Streams Saudi Light & Extra Light, Medium and
Heavy Combined
 Dubai/Oman complex representative of global sour
crude generally
1.5
1
0.5
0
 NOC and OSP system a hybrid in era of marketbased pricing, showing little sign of short-term
change - NOCs in Venezuela, and events in Brazil
and Russia not suggesting rapid positive evolution
 Asia less open to futures - based trading and
pricing historically, suboptimal core liquidity in
candidate contracts & insufficient price discovery
down curve
America
Europe
Asia
Total Platts Dubai/Oman (spot) trades:
Monthly 3prd average
250
200
No. of trades
 Fewer physical trading intermediaries for spot
liquidity and relatively narrow trading community
remain comfortable with this level of development
Source: IEA
2
150
100
50
January
April
July
October
January
April
July
October
January
April
July
October
January
April
July
October
January
April
July
October
January
April
 In Mid East & NOC generally less diversification of
equity ownership, sometimes physical liquidity
reduced therefore, and destination limited cargoes
has curbed assessment innovation
million b/d
 Mid-East Dubai, Oman, U. Zakum
2.5
2008
2009
2010
2011
2012
2013
DUBAI / OMAN & ESPO: EVOLVING ASIAN CRUDE MARKET
 ESPO has so far taken lead from Dubai
 Are published assessments embedded
yet in spot trade, derivatives urge?
 Urals Rebco failed to establish Russian
benchmark – physical convergence and
logistical issues
 New benchmarks very difficult to embed
 Market
prefers
pools/tools
existing
liquidity
 Possibly has helped underpin Dubai
liquidity within Asia-Pacific, which linked
to Brent complex through Brent/Dubai
EFS
 Correlation with Dated Brent strong „til
late 2011 – will this reduce need for
discrete pricing, given Brent‟s growing
reach in Asia?
Crude
Dated Brent (Forties)
ESPO Blend
Murban
Oman
Qatar Marine
Arab Light
Mars
Dubai
Sulphur(%)
40.3
34.7
40.2
32.95
33.8
33.0
29.2
30.4
0.56
0.6
0.79
1.14
1.84
1.83
1.94
2.13
ESPO/Dubai Differential vs. Brent/Dubai EFS
$/bbl
8
ESPO FOB Kozmino vs Dubai
6
4
2
0
-2
Source: Platts
29
API
Brent/Dubai EFS
ESPO SUPPLY GROWTH AND DIVERSIFIED BUY-SIDE
2012 ESPO Kozmino Loadings:
163 Cargoes (326,000 bpd)
Philippines 5
Taiwan - 1
Malaysia - 1
Singapore - TBC - 4
U.S. - 31
6 Indonesia - 5
Thailand - 9
South Korea
- 11
Source: ©2012, Energy Security Analysis, Inc.
 ESPO quality and consistency well-received by
Asia-Pacific and US West Coast refiners
China - 38
Japan - 52
 Popular with Asia refiners - proximity of Kozmino,
stable quality, storage there lacking though
 Flow potential to grow to 1.2-1.6m b/day
 Pipeline ensures no grade dilution
 Tax treatment vital vs. other Russian grades
 Still unexploited licenses?
30
Source: Argus Media
ESPO: EVOLVING ASIAN ROLE ALONGSIDE BENCHMARK DUBAI?
US based arbitrage buyer when ESPO competitive vs. ANS
ESPO Highlights:
 Can
a
Russian
benchmark
international prominence?
achieve
 Loan-for-exports deal with China agreed to
increase crude exports to China approx. to 620
kbpd over the course of 25 years, compared to
current 300 kbpd via Skovorodino to Daqing
Source: Argus
Media Ltd
 May reduce ESPO crude volumes marketed
on a spot basis, and overall Kozmino lifting
 The prospect of ESPO becoming an
standalone price benchmark thus weakened
 Future development of East Siberia may be
used to supply China direct instead of to
increase seaborne exports from Kozmino –
would undermine export diversification
Source: ESAI
 Potential alternative destinations to Japan,
Korea, and US West Coast would be impacted
 Plus arbitrage flows to US West Coast,
potentially lessening downward price pressure
on Alaska North Slope price
Source: ©2012, Argus Media
*ESPO Blend Exports from Kozmino Bay Less Deliveries to JV Tianjin,
31
SPREAD TRADING & INDEX REPLICATION: ICE BRENT FUTURES
GROWTH IN FORWARD CURVE LIQUIDITY
Contract Month Open Interest % Change in ICE
Brent and NYMEX WTI by tenor- 3 Year to April 2013
ICE Brent Quarterly Volume YoY %Chg
Q1 2013
32
Q3 2012
ICE Brent Crude Futures
$/bbl
Q2 2012
Q1 2012
ICE WTI Crude Futures
110
ICE Brent structural
premium to WTI in place
all the way to late 2019
105
100
95
90
85
Oct-19
Jun-19
Feb-19
Oct-18
Jun-18
Feb-18
80
Jun-13
Arbitrages east and west
Positive roll returns,
Draw downs smaller
Shows longer term spread consistency- returns
consistently higher/less volatile than WTI
 ICE Brent Overall OI growth 66% vs. 13%
 ICE Brent Volume growth 50% vs. 6.7%
 ICE Brent/WTI: structural premium for Brent in place
all the way to 2019
Q4 2012
ICE Brent and WTI Forward Curve COB - 06/05/2013
Brent: The global crude benchmark




-30%
Total
Oct-17
Sep-13
Jun-17
Aug-13
Feb-17
Jul-13
Oct-13
Jun-13
Oct-16
-20%
-20%
Jun-16
0%
-10%
Oct-15
20%
0%
Feb-16
40%
10%
Jun-15
60%
Feb-15
80%
20%
Oct-14
100%
NYMEX WTI Quarterly Volume YoY %Chg
30%
Jun-14
120%
Feb-14
NYMEX WTI
% Chg. in Quarterly Total Volume
% Change in Open Interest
ICE Brent
Quarterly Volume % Chg. Comparison
- ICE Brent vs. NYMEX WTI
INDICES & ENERGIES – PERFORMANCE-CRITICAL
WHAT INDICES TELL US ABOUT BENCHMARKS AND THEIR PHYSICAL INFRASTRUCTURE



Why oil is critical to most indices performance
Brent and Gasoil lead energy sub-indices (S&P GSCI & others)
Our contracts complement performance-oriented active indices for new vehicles and instruments better performers on roll return, new or emerging contract areas (E.g. S&P WCI)
ICE Contracts sub-index relative performance (S&P GSCI) 10yrs to Jan 2012:
1/2000 - 1/2010
ICE Brent
Crude Oil
ICE Gasoil
Heat
Spot Return
+210.73
+211.02
+185.94
+206.94
Total Return (TR)
+262.39
+132.48
+280.89
+189.9
TR-Spot (Roll Return)
+51.66
-78.54
+94.95
-17.94
(Source: Standard & Poor's)


33
High relative contributions - First & second generation indices show similar traits
Arbitrage ensures globally-relevant valuation (East & West), not local infrastructure conditions
INDEX PERFORMANCE
GLOBAL SEABORNE CONTRACTS CONSISTENTLY OUTPERFORM
ICE Contracts sub-index relative performance (S&P GSCI data as of 31/03/13):
Date/Period
ICE Brent TR
Crude Oil TR
ICE Contract Outperformance
ICE Gasoil TR
Heat TR
ICE Contract Outperformance
March 2013 YTD
1.89%
4.32%
- 2.43%
0.49%
-1.57%
2.06%
March 2013 1-yr
-5.07 %
-12.56 %
7.49 %
-6.65 %
-7.75 %
1.10 %
March 2013 3-yr*
46.51 %
-8.33%
54.86 %
40.27 %
28.39%
11.88 %
March 2013 5-yr*
-21.76 %
-61.32 %
39.56 %
-25.48 %
- 30.03 %
4.55 %
* Annualised figures
(Source: Standard & Poor's)
Also consistency of performance:
•
in January 2013, the 12-Month return of ICE Brent sub index was 9.86%, whilst WTI sub index fell 5.98%; the 3-Year
annualized return of ICE Brent was 64.63%, compared to 0.92% for the WTI Sub index
•
for the S&P GSCI in March 2012, the YTD return of ICE Brent sub index was15.35%, compared to 3.16% for WTI sub index
•
in January 2012, the YTD return of ICE Brent sub index was 3.79%, whilst WTI sub index fell 0.55%
•
in December 2011, the YTD return of ICE Brent sub index was 17.51%, whilst the WTI sub index fell 1.31%
•
in October 2011, YTD ICE Brent sub index was 18.65%, whilst WTI was minus 6.83%.
34
S&P GSCI SUB-INDICES PERFORMANCE COMPARISON
*Data has been based at 100, source: S&P
S&P GSCI Sub-Indices 5-Year Performance
250
S&P GSCI Brent vs. Crude Oil (WTI) Sub-Indices
3-Year Performance
S&P GSCI Brent Crude TR
200
S&P GSCI Crude Oil (WTI) TR
200
S&P GSCI Gasoil TR
160
S&P GSCI Heating Oil TR
S&P GSCI TR
150
120
100
80
50
40
0
2007
2008
2009
2010
2011
2012
0
Jul-2009
S&P GSCI Brent vs. Crude Oil (WTI) Sub-Indices
5-Year Performance
Jan-2010 Jul-2010
Jan-2011 Jul-2011
Jan-2012
S&P GSCI Gasoil vs. Heating Oil Sub-Indices
1-Year Performance
120
250
Index Name
200
Index Name
Total Return 3 Yr Ann. Returns
S&P GSCI Brent Crude TR 1,104.21
14.97%▲
1,339.58
S&P GSCI Crude Oil TR
1.00%▲
Total Return 5 Yr Ann. Returns
S&P GSCI Brent Crude TR
1,104.21
0.11%▲
S&P GSCI Crude Oil TR
1,339.58
-10.49%▼
110
100
150
90
100
80
S&P GSCI Gasoil TR
50
0
2007
35
70
S&P GSCI Heating Oil TR
60
2008
2009
2010
2011
2012
Jul-2011
Sep-2011
Nov-2011
Jan-2012
Mar-2012
May-2012
Jul-2012
INDEX PERFORMANCE
GLOBAL SEABORNE CONTRACTS CONSISTENTLY OUTPERFORM
ICE Contracts sub-index recent relative performance (Dow Jones-UBS, data as of 31/03/2013):
DJ-UBS Brent Crude Sub
index Total Return
DJ-UBS WTI Crude Oil
Sub index Total Return
ICE Brent
Out-performance
YTD
1.87
4.22
-2.35
2012
7.64
-11.77
19.41
1-Year
-4.62
-10.78
6.16
3-Year *
11.29
-3.85
15.14*
5-Year *
-3.79
-15.90
12.11*
10-Year *
13.06
2.98
10.08*
* Annualised figures
36
Source: Dow Jones-UBS
OIL TRENDS SUMMARY
CRUDE & PRODUCT FLOWS & THE FUTURE
Trends – where are we going?
 Brent has been for years and is growing as the reference marker for global crude prices
 Dubai remains overwhelmingly the most important Asia crude marker, Brent remains a
default alternative in Asia, and with failure of other exchange-traded instruments to
establish a liquid forward marker
 WTI price still dislocated from US and global markers due to the landlocked nature of the
benchmark, WTI/Brent curve has flattened, but still reflects modal arbitrage to Gulf now
part rail/part pipeline. Gas in transport pool is wild card
 Seaway reversal or Keystone XL do
Long term success of ICE Brent Futures
(3 Month Rolling Average)
not guarantee alignment between US
1,600,000
and international prices
1,400,000
 LTO boom not fully quantified, does not 1,200,000
match conventional yields, remains 1,000,000
800,000
highly price-sensitive, no developed
600,000
production profile/plateau effect
400,000
 US may be net „independent one day,
200,000
0
but imports and exports will still flow
 ESPO has grown as a marker but
ICE Brent Open Interest
ICE Brent Average Daily Volume
doubts persist over it , prices reference
Dubai, non-base-load still
NEXT STEPS
Additional Resources for ICE Brent and Brent NX Contracts:
Product Information:
ICE Brent FAQ: https://www.theice.com/publicdocs/futures/ICE_Brent_FAQ.pdf
Webinars: https://www.theice.com/webinars.jhtml
Contract Specifications:
ICE Brent Futures: https://www.theice.com/productguide/ProductSpec.shtml?specId=219#
ICE Brent Options: https://www.theice.com/productguide/ProductSpec.shtml?specId=218#
ICE Brent NX Crude Futures: https://www.theice.com/productguide/ProductDetails.shtml?specId=3775846
ICE Brent NX Crude Options: https://www.theice.com/productguide/ProductDetails.shtml?specId=3775848
HELPFUL LINKS:
Cleared Energy Markets https://www.theice.com/otc_energy_cleared.jhtml
ICE Energy Markets general overview
Cleared Product List https://www.theice.com/publicdocs/ICE_OTC_Cleared_Product_List.pdf
ICE Energy Markets general overview
OTC Clearing Members List
https://www.theice.com/publicdocs/clear_europe/ICE_Clear_Europe_Clearing_Member_List.pdf
An updated list of ICE Clearing Firms
OTC Clearing Guide https://www.theice.com/publicdocs/ICE_Clearing_Guide.pdf
An informative user‟s guide for Clearing Firms and participants
ICE Help Desk https://www.theice.com/help_desk.jhtml
For all administrative, trading, and technical related inquires
38
RESOURCES
For more information on ICE Brent and other ICE products
Oil markets please contact:
Mike Davis – Director, Market Development
+44 (0)20 7605 7753 mike.davis@theice.com
Europe:
Aaron Gill - MD Sales, Europe
+44 (0) 207 065 7735 aaron.gill@theice.com
Deborah Pratt - Director, Oil Marketing
+44 (0) 207 065 7734 deborah.pratt@theice.com
Options: Michelle Payne - Director, Accounts
+44 (0)20 7065 7754 michelle.payne@theice.com
US: Jeff Barbuto, VP Sales, Americas
+1 646 733 5014 jeff.barbuto@theice.com
Asia: Jennifer Ilkiw - VP Sales, Asia-Pacific
+65 6594 0161 jennifer.ilkiw@theice.com
Jean-Luc Amos - Oil Products Manager
+44 (0)20 7065 7744 jean-luc.amos@theice.com
ICE Help Desk: +1 770 738 2101 ICEHelpDesk@theice.com
39
END
40
ADDENDUM - ICE FUTURES: MIGRATION TO BRENT
RECENT QUOTATIONS (2013)
10/04/2013: Ajay Makan in London and Gregory Meyer, FT – Shale boom sees WTI lose crown
The US shale boom has spurred another revolution – this time ending three decades of supremacy for West Texas Intermediate as
the benchmark oil contract in financial markets.”
“For the first time, traders ranging from hedge funds to oil companies are making more use of Europe‟s Brent futures market to
hedge and speculate on the future direction of prices rather betting on WTI futures.”
“But surging production from shale oil regions such as North Dakota has deposited a record high 50m barrels in tanks at Cushing,
Oklahoma, the delivery point for WTI contracts, depressing prices. For the last three years, WTI has been discounted to Brent by
between $5 and $28 a barrel.”
“Mihir Worah, who oversees more than $25bn in commodities investments for Pimco, the fund manager, said: “Over the last couple
of years we‟ve viewed Brent as the global oil benchmark and completely ignored what‟s happening to WTI prices” as a guidepost to
decisions on macroeconomics and inflation.”
“In March just over 14m Brent futures contracts were traded on ICE Futures Europe and the Nymex, compared to 13.1m WTI
contracts. Brent volumes have remained higher than WTI so far in April. In March 2008, by comparison, 17.8m WTI contracts were
traded, compared to 5.7m Brent contracts.”
“Brent futures have been adopted by airlines seeking to insure against price fluctuations and economists studying how energy
costs influence growth. The US Energy Information Administration, Washington‟s official oil forecaster, late last year ditched
WTI and embraced Brent for its reference oil price, while Saudi Arabia stopped using WTI to price crude exports to the US in
2009.”
“The Brent market received a boost in 2012 when the Dow Jones-UBS commodity index, a basket of futures followed by
$74bn, added it for the first time, drawing more index trackers into the market.”
„“Before Brent came into the index … we wouldn‟t necessarily have had a core holding in Brent,” said Peter Kocubinski, who
manages $150m as head of JP Morgan Asset Management‟s commodity investment team. Now, “a percentage of the index has
been made up of Brent and I would assume that along with us a lot of others have been increasing their open interest in Brent.”‟
41
ICE FUTURES: MIGRATION TO BRENT
RECENT QUOTATIONS (2013)
08/04/2013: Michael Kavanagh, FT – Abandoned oil discoveries enjoy revival
“When production starts at the Johan Sverdrup oilfield in Norwegian waters later this decade, it will provide a big boost to the
country‟s declining oil and gas output.”
“The discovery made by Sweden-based Lundin Petroleum in 2010 was the world‟s biggest that year and could yet emerge as one
of Norway‟s largest discoveries ever.”
“Statoil, the Norwegian oil major that operates Johan Sverdrup, is now preparing to open up the recent discovery.”
“But many of the other costly developments scheduled to come on stream in the North Sea over the coming years are not new
finds. Instead, a combination of high oil prices, better technology and some generous tax breaks have made it economic to lift
deposits that were previously known about, but which were deliberately left in the ground because, at the time, the cost of
extraction was too high.”
“In the coming months, Statoil also expects to make a decision on whether to develop the nearby Bressay heavy oilfield in UK
waters at a cost of $5.5bn. Extraction has been considered uneconomic since it was discovered in 1976, but Statoil hopes to
change that by exploiting its expertise in lifting heavy oil from Norwegian and Brazilian fields.”
“It is not just oil majors that are committing billions of dollars to North Sea fields previously thought to be uneconomic.”
“In spite of early-stage funding difficulties, Xcite Energy has now drawn and sold oil from its Bentley field, which was first
discovered in 1977.”
„Rupert Cole, chief executive of Xcite, says “We shall now continue to move the project forward with ongoing studies into the
potential for enhanced oil recovery, which has yet to be factored into the reserves assessment”.‟
“EnQuest, the FTSE 250 North Sea Oil operator, also plans to restart production at Alma/Galia, Britain‟s first producing North Sea
oilfield, by the end of this year.”
“In 1996, Royal Dutch Shell and ExxonMobil ceased production at their Schoonebeek oilfield on the Dutch-German border, after
nearly 50 years in which the field produced 350m barrels of oil. Declining production of treacle-like oil meant an estimated 750m
barrels were left in the ground.”
“But in 2011, the joint venture restarted production using steam injection techniques that thin the remaining oil so it can be
extracted.”
42
ICE FUTURES: MIGRATION TO BRENT
RECENT QUOTATIONS (2013)
13/02/2013: Jacob Bunge and Jerry DiColo, Dow Jones Newswires – An oil market shift means trouble for CME
“London is about to cement its place as the capital of oil trading, knocking New York off the perch for the first time. “
“In April, monthly trading volume in West Texas Intermediate crude oil futures traded on CME's New York Mercantile Exchange
was overtaken by the Brent oil futures offered by ICE. Now, analysts believe, open interest on the Brent contract - a closely
watched measure of trading activity and market liquidity - is set to overtake WTI, based on the recent trajectory of market activity. “
“In terms of the volume of contracts traded, Nymex-listed WTI's share of the global oil futures market has shrunk to 49% from 67%
versus ICE's Brent contract since CME bought the Nymex in 2008, as ICE has leveraged the appeal of the Brent contract offered
by its London-based ICE Futures Europe unit.“
“London's broader role as the global trading capital for currencies and other commodities, such as metals, helped draw business to
Brent as energy consumption soared in China, India and elsewhere, while shipping and energy companies in emerging markets
warmed to derivatives as a risk management tool.“
„"Ten years ago, people ignored Brent, and WTI was the marker," said Fadel Gheit, an energy sector analyst at Oppenheimer &
Co. Over the past two years, nearly all the major oil producers and refineries have embraced Brent, he said. "Once they decided
this was the right direction, they really went heavy on it," said Gheit.‟
“WTI's role has waned as a result of pipeline bottlenecks in the US and idiosyncrasies in the way oil backing the benchmark is
delivered. Holders of WTI futures can take physical delivery of the oil at a key US transit hub in Cushing, Okla., and a supply glut
there depressed prices, creating a steep discount in the price of WTI compared with Brent. In the past, the contracts traded within a
few dollars of each other.”
“The gap has prompted many traders and investors to focus on Brent as a more accurate indicator of global oil prices.“
“ICE capitalised on this, pushing options contracts linked to Brent crude by adding new chat services for traders and designing
market data and analysis services to highlight the London market's strengths.”
43
ICE FUTURES: MIGRATION TO BRENT
RECENT QUOTATIONS (2012)
06/12/2012: Christian Schmollinger and Ramsey Al-Rikabi, Bloomberg – Brent Favored Over WTI by U.S. Administration
for First Time
“The Energy Information Administration in Washington dispensed with West Texas Intermediate for its price forecasts in its Annual
Energy Outlook 2013 released yesterday, adopting North Sea Brent crude instead. It‟s the first time the department has used Brent,
reflecting “a growing discrepancy” between WTI and global crude prices, it said.”
“WTI has fallen 11 percent this year as the U.S produces oil at the fastest rate in almost two decades amid a boom in horizontal
drilling and hydraulic fracturing, or fracking, that‟s putting the country on course to become self-sufficient in energy. Brent, a
benchmark grade for prices from Saudi Arabia to Russia, has risen 1.4 percent, underscoring growing demand in Asia and concern
about supply disruptions from places such as the North Sea and Libya and international sanctions on Iranian exports.”
„“This makes perfect sense as Brent is a better reflection of global oil demand and supply than WTI,” Gordon Kwan, the head of
regional energy research for Mirae Assets Securities Ltd. in Hong Kong, said in a phone interview. “WTI has become a misleading
price indicator for global economic growth and will become increasingly less relevant versus Brent oil.”‟
“Prices, Weightings – “Brent‟s allocation in the Standard & Poor‟s GSCI Commodity Index of 24 raw materials will be increased to
22.34 percent from 18.35 percent in 2013, while WTI‟s will be cut to 24.71 percent from 30.96 percent, Michael McGlone, a vice
president at S&P Dow Jones Indices, said on Nov. 5.”
„“This is the first time the AEO is using Brent as the main driver in the reference case,” said Adam Sieminski, administrator of the
EIA, a unit of the U.S. Energy Department, referring to the outlook. “It was important for EIA to use a global marker.”‟
“Daily trading in ICE Brent futures jumped 13 percent to average 560,149 contracts in the year to Dec. 5 compared with all of 2011,
while Nymex WTI fell 18 percent to 567,583, according to data from the exchanges compiled by Bloomberg. That was the
narrowest gap in trading volumes between the two grades in percentage terms since they began trading in the 1980s.”
“The number of Brent futures changing hands has also exceeded those for WTI every month from April through October, the
longest streak since at least 1995. WTI will continue to represent a land-locked crude until infrastructure is built to connect it to
global markets, according to Anthony Nunan, a senior adviser for risk management at Mitsubishi Corp. in Tokyo.”
„“Brent ..is used as the benchmark for all West African and Mediterranean crude, and now for some Southeast Asia crudes, it‟s
directly linked to a larger global market,” Nunan said in a telephone interview. “It just became obvious to switch to another marker.”‟
“Brent is closer to the prices of crudes from the Organization of Petroleum Exporting Countries than WTI, making it a more useful
reference point at OPEC meetings. ”
44
ICE FUTURES: MIGRATION TO BRENT
RECENT QUOTATIONS (2012)
26/12/2012: Grant Smith, Bloomberg – Brent Poised to Oust WTI as Most-Traded Oil Futures
“For the first year since the futures were created, Brent crude is poised to overtake West Texas Intermediate oil as the world's
most-traded commodity.”
“Daily trading in Brent jumped 14 percent to average 567,000 contracts in the year to Nov. 20 compared with all of 2011, while WTI
fell 17 percent to 575,000, according to data from the ICE Futures Europe exchange in London and New York Mercantile Exchange
compiled by Bloomberg. The number of Brent futures changing hands has exceeded those for WTI each month from April through
October, the longest streak since at least 1995.“
“Brent, produced in the North Sea, is gaining favor among traders because of its role as the benchmark for energy prices from
Saudi Arabia to Russia.“
„“Brent crude will grow in significance,” Angelos Damaskos, manager of the Junior Oils Trust, which invests about 45 million
pounds ($72 million) in energy companies, said by phone from London on Nov. 20. “The market is looking at Brent as the
international leading index for traded crude. It will be a trend that will continue for a very long time.” „
“The world's most-tracked commodity indexes are adjusting their weightings in response to the expanding Brent volumes, raising
the likelihood that investors who use such gauges will follow suit.“
“Brent's allocation in the Standard & Poor's GSCI Commodity Index of 24 raw materials will be increased to 22.34 percent from
18.35 percent in 2013, while WTI's will be cut to 24.71 percent from 30.96 percent, Michael McGlone, a vice president at S&P Dow
Jones Indices, said on Nov. 5. The Dow Jones-UBS Commodity Index will similarly expand the portion allotted to Brent and reduce
WTI, according to an Oct. 24 statement.”
„“The market has moved over with its daily volumes into the Brent contract, and clearly the passive indexes going forward will reweight as well,” King said from London. “Without doubt it's a transition that's happening and will probably continue to happen
unless or until the WTI contract gets reacquainted with the global marketplace.”„
„“As there's more shift into Brent at the expense of WTI, we see the index players will increase their position and their trading on
Brent relative to WTI,” said Itay Simkin, chief executive officer of Krom River Trading AG in Baar, Switzerland, which has a
commodities hedge fund managing about $730 million. “We definitely trade more Brent and its products than before.” „
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20/11/2012: Harold Sunday, Reuters – Brent to Eclipse US Crude as World Oil Benchmark
“It has been coming for years, but Brent looks set finally to overtake U.S. light crude as the preeminent oil benchmark next year as one of
the top financial market indexes switches weightings. Brent is becoming the hedge of choice for big investors, even for U.S. companies. The
volume of Brent futures and options has soared, boosting liquidity at the expense of the U.S. crude also known as West Texas Intermediate,
or WTI.”
“The widely followed S&P GSCI index marks this on Jan.1, raising its weighting for Brent and cutting WTI, following a migration by major oil
producers and consumers. Saudi Arabia and other producers have already moved away from the landlocked U.S. grade while oil refiners,
end-users and hedge funds have gravitated towards the North Sea benchmark that they think tracks global risk more accurately. “ Can we
all just forget about WTI?" Ian Taylor, the head of the world's biggest oil trading company, Vitol, asked an industry conference in London this
month. "It's no longer an international currency of any value whatsoever.“‟
“Average volume this year for Brent futures on ICE has overtaken WTI traded on NYMEX by more than 30,000 lots per day, exchange data
show, with Brent at over 600,000 and WTI trailing around 570,000. Combined volumes of the two exchanges still show WTI futures ahead in
terms of volume and open interest, but Brent is closing and looks set to eclipse its U.S. rival early in the New Year. Even U.S. mid-sized
producers have begun switching from WTI to Brent in their hedging programs," said Jack Kellett, the head of oil at inter-dealer broker GFI“
“John Kilduff, at hedge fund Again Capital in New York, says U.S. end-users are becoming more sophisticated, venturing into Brent because
it more closely reflects oil product price moves. Brent is not yet fully embraced by companies solely with U.S. exposure, but the idea of Brent
being the (grade with) true international exposure is gaining acceptance," Kilduff said.‟
“A string of companies in the Americas have adopted Brent: U.S. carriers Southwest Airlines and Delta have switched to Brent to hedge their
exposure to jet fuel. Colombia's Ecopetrol said last month it was moving the pricing basis for crudes to the North Sea grade and Trinidad
state company Petrotrin and partners Bayfield have also said they will sell oil linked to Brent, dropping WTI.”
“The main criticism of WTI has been that it no longer tracks the international spot market as efficiently as Brent. Growing U.S. and Canadian
oil production has driven down the price of crude oil in the Midwest of the United States, where WTI is priced, and an inadequate pipeline
network has made this problem worse, helping depress WTI prices versus Brent.”
“The WTI futures contract is also at a disadvantage because of its price structure. With the WTI front-month contract at an almost permanent
discount to forward barrels, investors who track the contract are penalized by a negative roll-yield. Each time the first WTI futures month
expires, investors have to replace it with a more expensive later month. But Brent has a positive roll yield, with the front month at a premium
to later months, giving an easy profit for investors. "WTI is in a permanent contango and many funds are trying to manage the roll exposure,"
said Kellett at GFI. Brokers have seen a wave of volume coming into Brent and say the reallocation of weightings by the S&P GSCI will
accelerate the process. From Jan. 1, GSCI will cut WTI by 6.25 percent to 24.71 percent and raise Brent by 3.99 percent to 22.34 percent.“‟
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08/11/2012: S&P – Commodities Market Attributes November 2012
“Increasing North American crude oil production, slack U.S. demand and export limitations have continued to pressure the S&P
GSCI Crude Oil index to be the largest single commodity drag on S&P GSCI total returns as measured by the 17.04% year-to-date
(YTD) decline on the back of a 8.10% decline in Q4.”
“Unleaded gas and Brent crude, although under pressure in Q4, have been the largest contributors to energy sector total returns in
2012 as reflected by the YTD gain of 3.87% in the S&P GSCI Brent Crude index.”
“Seaborne Brent crude continued to gain ground as a global benchmark compared to land locked U.S. based WTI Crude as
reflected by the 2013 S&P GSCI annual rebalance which increased the weight of Brent crude and decreased the weight of WTI
crude oil for the fourth straight year”
06/11/2012: Jack Farchy, FT – Index change to prompt US crude sell-off
“Investors will be forced to buy billions of dollars of Brent oil futures and sell US crude after S&P GSCI, the most widely tracked
commodity index, said it would increase the weighting of the North Sea benchmark at the expense of West Texas Intermediate.”
“The change, effective in January, is likely to affect the price difference between Brent and WTI, one of the favourite spreads traded
by specialist hedge funds and commodities trading houses.“
30/10/2012: Jack Farchy and Emiko Terazono, FT – US oil prices fall below $85 a barrel
„“This is feeding the inventories in Cushing,” said Harry Tchilinguirian, head of commodity market strategy at BNP Paribas,
although he added that inventories of refined products such as gasoline and diesel remained tight, raising the prospect of a
“product led rally for crude as we reach the peak winter demand”.‟
“The trend of rising production and stocks has weighed on US oil prices relative to global prices as measured by benchmark Brent
futures, hurting pension funds and other investors who hold WTI futures as a means of tracking commodity prices.”
„“We don‟t have the capacity yet to de-bottle neck Cushing,” Mr Tchilinguirian said. “This continues to weigh on WTI prices,
entrenching its discount to Brent.”‟
“The discount of WTI to Brent rose to as much as $22.62 a barrel on Wednesday. It is once again approaching the record gap of
almost $30 touched a year ago.”
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14/09/2012: Argus Crude Issue 12H-183 – Vietnam prices Song Doc against Dated Brent
“Vietnamese state-controlled marketer PVOil offered November-loading supplies of medium-sweet Song Doc crude against Dated
Brent for the first time today, moving away from its‟ typical 50:50 Platts Minas/APPI Minas basis.”
“Vietnam now prices most of its crude and condensate exports against Dated, with the exception of medium-sweet Sutu Den.
PVOil currently sells Sutu Den via a July-December term contract with buyers ConocoPhillips, JX and Mitsubishi at $6/bl premium
to Minas, but is widely expected to drop the Minas benchmark in favour of Dated Brent for its next term tender.“
17/08/2012: S&P – Commodities Market Attributes August 2012
“On a spot basis, seaborne Brent crude has been the best energy performer as measured by the Q3 spot S&P GSCI Brent index
increase of 16.93%.“
“..Reflecting this, is the sharp 11.02% MTD increase in Brent crude as measured by the S&P GSCI Brent Crude index compared to
8.57% in the S&P GSCI Crude Oil index. WTI crude, a measure of the well supplied U.S. crude oil market, has increased 12.04%
in Q3 as measured by the spot S&P GSCI Crude Oil index compared to 18.37% for the S&P GSCI Brent index.“
“Benefitting U.S. consumers and refiners, spot WTI crude oil and natural gas are the only S&P GSCI Energy commodities still down
on the year (as of August 16) with declines of 2.97% and 7.43% respectively (as measured by the spot S&P GSCI WTI Crude Oil
and Natural Gas indices). … With the second highest weight among the 24 S&P GSCI commodities, Brent crude has been one of
the most significant contributors to total returns in 2012.“
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16/08/2012: David Hufton and Tamas Varga, PVM – The suitability of Brent as a marker
“… We will not be apologists for the volatility of the Brent price or whether physical fundamentals decree that it should be in
contango or backwardation. Suffice to say that the crudes making up the Brent “quote” can be exported to the US, mainland
Europe, the Mediterranean and Asia, and they are. Brent is a genuinely international crude oil, with no barriers to distribution.
“We should also remind ourselves why Brent has displaced WTI as the world‟s crude oil marker. WTI lost contact with the
international market. Oil poured into the landlocked Nymex delivery point of Cushing and there was no mechanism to relieve the
surplus. “
“Of course Brent is imperfect but we would suggest that it is the inevitable consequence of any marker when it becomes the
commodity grade of choice. If you are nervous about events in the Middle East and want to reflect this in your investment portfolio
you can only do this by taking length in a liquid contract. Your only real choice as far as oil is concerned is Brent via futures or
swaps. We screamed from the rooftops two years ago in our reports that the decline of WTI and the rise of Brent in index funds
would create a significant Brent premium. It is the fate of the marker grade to carry a substantial premium in a bull market and a
substantial discount in a bear market. When bullishness brought on by geopolitical factors happens to coincide with a North Sea
maintenance period it makes for a heady price cocktail.”
15/08/2012: Jonathan Dart, Platts – USGC ULSD exports to Europe more in line with European spec: trade
“The focus of US Gulf Coast refineries on the European export market has meant 10 ppm diesel flows move more into line with
European ultra low sulfur diesel specifications, traders said Tuesday. “
„"The US is now an export market...they need to make the grade that people want to buy," a European diesel trader said. „
“the ULSD arbitrage from the USGC has not been as easy to work over recent weeks, but with the Northwest European cargo
premium rising there could be an increase in arbitrage flows. “
“The September CIF NWE swap was trading at around $39.75/mt over September ICE gasoil futures, which were at $956.25/mt at
1435 GMT Tuesday, equaling an September CIF NWE price of $996/mt. “
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RECENT QUOTATIONS (2012)
02/08/2012: Lananh Nguyen and Steve Voss, Bloomberg - London Overtakes New York as Brent Oil Beats WTI
“For the first time, London is overtaking New York as the global hub for trading oil futures. “
“More contracts in North Sea Brent crude changed hands in June than at any time on record, data from the ICE Futures Europe
exchange show. It was the first full quarter and third consecutive month in which Brent trading on London's ICE surpassed West
Texas Intermediate oil on CME Group Inc. (CME)'s New York Mercantile Exchange.”
“The trend underlines London's resilience as a financial center in the face of Europe's sovereign debt crisis and supports Brent's
status as the benchmark grade for pricing more than half of the world's oil. “
„“When you look at Brent, you're looking at the geopolitical situation in the Middle East and North Africa,” said Martin Arnold, a
senior research analyst at ETF Securities Ltd., which listed the world's first exchange-traded commodity product for oil in 2005. “It
responds with a greater magnitude to those global issues” than the U.S. grade, which reflects “domestic factors rather than global
developments,” he said in a telephone interview from London on July 27. „
“The average daily volume for ICE Brent futures rose 17 percent in June to a record 716,752 contracts, an increase that helped
Intercontinental Exchange Inc. to report an 18 percent gain in second-quarter net income yesterday. Trading in WTI, Nymex's
flagship contract, climbed 6 percent in June to 599,674 lots, with CME Group reporting a 17 percent decline in profit for the same
quarter. “
„“Since April of this year ICE Brent volumes have for the first time consistently exceeded CME WTI and by a big distance,” said
David Hufton, managing director of PVM Oil Associates Ltd. “Traders in Asia, the fastest-growing energy market, track North Sea
crude because it's a closer match to the value of exports from the Middle East. That's prompting exchange-traded funds and
commodity indexes used by investors such as pension funds to allocate Brent a bigger share in their mix of holdings, according to
Andrey Kryuchenkov, an analyst at VTB Capital, the investment-banking unit of Russia's second-biggest lender. “
„“Big funds are readjusting their allocations in favor of Brent,” Kryuchenkov said in a July 27 interview from London. “People are
piling up cash into Brent driven by expectations for Asian demand and geopolitics in Iran and Libya because it is more globally
relevant.” „
“Standard & Poor's has increased Brent's weighting in its GSCI Index of 24 raw materials for the past four years, raising it to 17.35
percent this year from 13.68 percent in 2009. It cut the proportion of WTI to 30.25 percent from 39.75 percent over the same period.
The Dow Jones-UBS Commodity Index included Brent for the first time this year. “
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(cont.)
“The index weights have increased for Brent and decreased for WTI, reflecting the hedging demand growth for Brent,” Jodie
Gunzberg, the New York-based head of commodity indices at S&P Dow Jones Indices, said in a July 31 e-mail. „
“While Brent has remained easily accessible to traders, the U.S. production boom has combined with a lack of outbound pipelines
from Cushing, Oklahoma, the delivery point for WTI futures, to create an inventory glut that's widened the price difference between
the two grades. WTI traded at an average discount of $15.68 to Brent since the start of 2011, compared with 76 cents in 2010.“
„“Because Brent is seaborne, it can reach any market in the world by ship, reinforcing its global relevance and thus, trading activity
in ICE Brent futures and options,” David Peniket, president and chief operating office of ICE Futures Europe in London, said in a
July 31 e-mailed response to questions.„
“Open interest, the number of contracts that have not been closed, also signal Brent's growing status. Open positions in Brent have
risen for five years and grew 35 percent from December to June, versus WTI's 9 percent gain over the same period.”
“Brent's appeal to investors has also risen because of the premium, or backwardation, of near-term futures relative to later
supplies. That gives traders a profit as they roll over their front-month holdings before expiry into later contracts. Brent was in
backwardation for all but two weeks this year and for most of 2011. “
“WTI futures typically traded in the reverse structure, or contango, since 2008, which results in a loss as investors sell front-month
futures and buy deferred contracts.“
„“The greater tendency of Brent to go into backwardation facilitates long-only positions which tend to be the ones the hedge funds
go for,” David Wech, head of research at JBC Energy GMBH, a consultant based in Vienna, said in an e-mailed response to
questions. “Rolling-over in a contango market is simply costly.”‟
30/04/2012: Philip K. Verleger, Jr., Notes at the Margin – Exercises in Economic Game Theory
“…, the rise in open interest in Brent futures contracts merits attention. …, open interest in Brent has increased almost fifty percent
from a year earlier. Meanwhile, open interest in the WTI contract is unchanged. The higher open interest can no doubt be
explained by the persistent discount in WTI and the contract‟s associated loss of relevance. Brent‟s emergence as the sole liquid
futures market related to world conditions has likely helped boost the rise in open interest as well. “
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21/03/2012: Javier Blas Financial Times (London) - WTI loses ground in physical oil market
“West Texas Intermediate is losing further ground as a global oil benchmark.The travails of US crude in the derivatives market are well
documented, with the oil contract trading at a discount to the Brent benchmark for the last few years.
But now Vitol, the world‟s largest oil trading house, has provided evidence of the impact of WTI‟s problems in the less known physical
market. It says that between 2008 and 2011, the US benchmark has lost half of its share in the physical market.
The oil trading house estimates that WTI was used as a benchmark for physical transactions of about 20 per cent of global
oil in 2008. By late 2011, that share has halved to just 10 per cent, while Brent and others gained.
The figures were revealed by David Fransen, managing director of Vitol: “The [physical] market is clearly saying we do not like that
[WTI] benchmark,” Mr Fransen says. “WTI is no longer reflecting the global reality.”
… since 2008, its price has been erratic, often trading at discounts of more than $20 to crudes such as Brent or Dubai, a benchmark in
the Middle East. The price disconnect has forced some investors to switch their exposure. Moreover, companies, such as US-based
airline Delta, have also switched from WTI to Brent as a reference for their hedging programmes. Saudi Aramco, the state-owned
company, used WTI prices published by Platts. But Riyadh in 2009 switched to a new index developed by Argus, the London-based
oil pricing company. The Argus Sour Crude Index (Asci) tracks three varieties of crude produced in the US Gulf of Mexico.
Brent accounts for 53 per cent – up from 45 per cent in 2008 ”‟
28/02/2012: Mondovisione - ETF Securities Expands Brent Crude Range Against A Background Of Rising Geopolitical
Tensions – Four New Products Listed on the London Stock Exchange
“ETF Securities listed four new exchange-traded commodity products on the London Stock Exchange, in recognition of Brent Crude‟s
growing importance as the new global benchmark for oil. Brent crude is increasingly seen as the global benchmark for crude oil,
particularly as West Texas Intermediate has been beset with local logistical issues that have seen it move to a significant discount to
Brent.
Commenting, Neil Jamieson, Head of UK Sales, ETF Securities (UK) Limited, said: “The launch of these new Brent exposures is
timely. Brent has emerged as the reference benchmark for crude oil and is therefore potentially sensitive to developments that could
impact international oil supplies. Our recent poll shows that investors are understandably concerned about how to position themselves
in light of the continued unrest in the Middle East.”
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RECENT QUOTATIONS (2012)
27/02/2012: Tom Osborn, Financial News - Brent becomes a crude bellwether for global oil tensions
“In January, open interest in the contract – the total number of positions held by traders – topped the one million mark for the first time,
the notional equivalent of one billion barrels of oil.”
„Gareth Lewis-Davies, oil market strategist at BNP Paribas, said : “Brent is the better marker for international pricing. WTI is priced
much more closely according to local factors. It‟s an isolated market, and can‟t be physically moved around as easily. Brent is,
therefore, seen as the better hedging tool against real global price risk.”‟
06/02/2012: Sarah Kent, WSJ - Oceans of Flexibility Give Brent an Edge Over WTI
“Brent crude is bolstering its reputation as the best indicator of global oil prices in 2012, using its transportation flexibility to
outmaneuver landlocked U.S. benchmark West Texas Intermediate.
The role of West Texas as the pre-eminent international oil benchmark came into question last year after a backlog at its delivery point
of Cushing, Okla., caused it to disconnect from the global market.
By contrast Brent's flexibility as a waterborne crude has allowed it to weather significant changes in its own market, analysts say. One
reason Brent has been able to gain traction is its access to international markets compared with WTI.
Over the last three months a significant volume of crude from the North Sea has travelled to Asia,… According to shipping fixtures
examined by the Wall Street Journal, at least 12 million barrels of North Sea Forties crude were booked to travel to Asia between
December and February, a trading move virtually unheard of before late last year. Forties crude is the largest component of Dated
Brent, the physical oil benchmark used to price the majority of the world's crude oil.
"In this way, Dated Brent is acting as a true global benchmark and is sheltering the Brent complex by limiting downside distortion,"
JBC Energy said in a note published last week.
"It's a good sign if a benchmark is traded by other regions," said David Wech, head of research at JBC Energy.
…11.2 million contracts of Brent traded last month, 5% more than the 10.7 million contracts traded a year earlier. By contrast, CME
Group recorded monthly trading volume of 12.6 million contracts in WTI, a 30% decline from 17.9 million contracts a year earlier.”
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RECENT QUOTATIONS (2012)
02/02/2012: Grant Smith, Bloomberg - Brent Glut Sends Most North Sea Cargoes to Asia since 2004: Energy Markets
“More North Sea oil is being shipped to Asia than at any time in the past eight years as prices fall to their cheapest levels in 15 months
compared with Middle East alternatives.
While still more expensive than Middle East grades, Brent's narrowing premium is making it more attractive to Asian refiners because
it's cheaper and easier to process into higher-value products such as gasoline and diesel, according to JBC Energy GmbH, a Viennabased consultant.”
„“North Sea Forties, the usual price-setter of Dated Brent, seems to be increasingly becoming an arbitrage crude,” analysts led by
Johannes Benigni at JBC Energy wrote in a Jan. 31 report. “Substantial volumes have been sent to Asia over the last three months,
with China, South Korea and Australia accounting for the bulk.”‟
20/12/2011: Gregory Meyer, FT - US oil boom town prompts crude glut fears
“Despite its importance as a pricing hub, Cushing is still an opaque marketplace. The energy department began measuring oil there
only in 2004 and tank capacity late last year.
One company, Genscape, sends a helicopter above the complex twice a week to shoot photos and infrared video in an effort to gauge
inventory for clients. Another uses satellites.”
„“Frankly, a lot of the storage folks don‟t want you to know how much they‟re storing,” says Brent Thompson, executive director of the
Cushing Chamber of Commerce and Industry.”‟
20/12/2011: Gregory Meyer, FT - Price of crude: Reversal of fortune
„“Crude oil is extraordinarily efficient, internationally. Gaps that exist, exist for very short periods of time,” says James Dyer, chief
executive at Blueknight Energy Partners and a senior executive at Vitol, the world‟s largest independent oil trader. Blueknight owns
crude oil storage tanks in Cushing.
But some estimates show the volumes Seaway will carry are far less than the amount set to pour into Cushing in coming years, as
production bounces higher in places such as the Permian Basin in west Texas, the Bakken formation in North Dakota and Canada‟s
oil sands.‟
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21/10/2011: Brian Ellsworth and Bruce Nichols, Reuters - Petrobras abandons WTI, joins move to Brent pricing
“Brazilian state oil company Petrobras has switched its pricing of its U.S.-bound crude oil exports to a Brent benchmark, the
company's supply director said on Friday, the latest sign of the waning influence of the West Texas Intermediate marker. While
Petrobras ships a relatively modest 245,000 barrels a day of crude to U.S. buyers, the switch is yet another blow to the
beleaguered U.S. benchmark, which has grown increasingly isolated as airlines, exporters, hedge funds and even commodity
indexes shift more of their trading to Europe's Brent. In September, Colombia also switched entirely to Brent-based pricing.
The difference or "spread" between the North Sea and U.S. crude pricing benchmarks has reversed sharply from a $2 difference in
favor of WTI to a $25 gap in favor of Brent in the past year, driven by a flood of Canadian crude into U.S. storage tanks that has
depressed the WTI price.
The spread and oil price volatility due to global economic and political issues have increased the risk for sellers of foreign crudes
historically priced against WTI, so producing countries increasingly have looked to Brent.
Petrobras' departure from WTI is significant because Brazil within the next ten years is expected to become a major oil exporter as
it taps into the ultra-deep-water fields in the region known as the subsalt. The effectiveness of WTI as a world benchmark has been
questioned for years because it does not compete like Brent on the world market. It delivers to the interior of North America, at
Cushing, Oklahoma, and stays in the interior due to a lack of coast-bound pipelines. Global demand for crude has kept Brent
strong, pushing the spread between WTI and Brent to record levels. On Friday, the IntercontinentalExchange said open interest in
its Brent crude oil futures contract had reached a record high of nearly 1 million contracts. Open interest in New York Mercantile
Exchange WTI contracts stands at around 1.4 million, down 15 percent from a record in May.”
02/05/2011: Chevron CFO Patricia Yarrington, HOUSTON (Dow Jones) - Brent to Replace WTI In Way Co. Gauges Foreign
Production Contracts' Effect:
““Chevron will start using European Brent crude benchmark prices, instead of Nymex-traded West Texas Intermediate oil prices,
when it calculates the effects of production-sharing contracts signed with foreign governments. These contracts reduce the amount
of output received by companies when oil prices rise. In order to gauge the impact of production due to oil-price variation, Chevron
and other oil companies have traditionally used WTI prices.
But given the sharp price disparity between the two benchmarks, Chevron is switching to Brent, which is used in most international
contracts.” Yarrington said.”
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