Brent v WTI, the battle of the crude oil price benchmarks

11 June 2010 11 June 2010

BonTrade

London based Brent crude is a far better reflection of the global oil market than its US rival WTI and will dominate world oil trading as Asian markets grow, the IntercontinentalExchange said on yesterday.

David Peniket, the President and Chief Operating Officer of ICE Futures Europe told Reuters Global Energy Summit he saw volumes growing rapidly on his exchange’s main oil benchmark in the coming years.

“Particularly with ongoing growth in Asia we would expect Asian market participants to use Brent to hedge their risk rather than other benchmarks,” Peniket said.

“Brent is the global oil benchmark. Brent is used as the price benchmark for around two thirds of the world’s traded oil. It reflects the fundamentals of the oil market on a global basis and we’re seeing Brent used as part of the pricing for oil throughout the world.”

The US crude oil benchmark, known as West Texas Intermediate or WTI, has faced criticism over the past month, with claims it at times only reflects market conditions in the US Midwest.

The contract slumped to a huge discount to Brent and other grades of oil earlier in May 2010 as stocks mounted up at the contract’s delivery point in Cushing, Oklahoma.

“I think WTI is a good reflector of US fundamentals but even with respect to the US market you have seen WTI become dislocated from other crude grades,” Peniket said.

“Recently LLS (Louisiana Light Sweet Crude Oil) has traded at a $5 premium to WTI and even Mars which is a sour crude grade traded at a premium. Clearly WTI is an important US benchmark but I don’t think it reflects the fundamentals of the global oil market in the way that Brent reflects them.”

CME Group, which runs the NYMEX where benchmark US Light crude oil primarily trades, gave a vigorous defense of WTI on Tuesday, arguing it was bolstered by increased transparency and better data.

Traded volumes of WTI on the NYMEX Exchange are far higher than those of Brent on ICE, but the gap has been narrowing over the last two years.

“From 2008 to 2009 Brent grew by 8 percent in volume terms while WTI grew by 2 percent. In the first quarter of this year Brent grew by 34 percent while NYMEX WTI grew by 8 percent,” Peniket said, but declined to comment when he thought Brent volumes on ICE might outstrip WTI on NYMEX.

“We have seen significant growth in Brent and we think it is the leading global benchmark. It has historically been the oil markets marker in that sense and I think WTI has tended to have had more financial market participation.”

“Brent is a seaborne crude, it’s at a point of the world where crude oil can move around and it can act as a point of arbitrage between different crude grades.”