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U.S. Crude’s Impact on the Global Oil Market

Approximately two years ago, the global oil market faced an unexpected revelation from bp Plc, a British oil major, stating that its crucial pricing benchmark, the North Sea crude price Dated Brent, was encountering frequent disruptions. This announcement not only raised concerns about the stability of the benchmark itself but also cast a shadow on Brent futures, a multi-billion dollar financial market utilized for both hedging physical transactions and speculation.

Fast forward to today, nearly three months into the revamp of the Dated Brent measure, wherein U.S. oil was introduced to assist in setting the benchmark, it is evident that this overhaul has tackled some of the challenges identified by the London-based firm. The inclusion of U.S. oil has led to a substantial increase in tradeable oil cargoes, effectively mitigating sudden price fluctuations in Dated Brent.

Adi Imsirovic, Director of consultant Surrey Clean Energy and an experienced trader, who also serves as the editor of the book “Brent Crude Oil,” emphasizes that falling supply had been the primary predicament for Brent. The incorporation of WTI Midland, a type of U.S. crude oil, aimed to enhance liquidity and avoid bottlenecks in the Brent benchmark.

Previously, the supply was tightly controlled by a select few traders, granting them significant influence over the market. However, WTI Midland’s inclusion has expanded the pool of available benchmark grades, curbing the dominance of individual traders and promoting a more balanced marketplace.

Platts, a leading energy information provider, acknowledges the positive impact of WTI Midland’s inclusion, as it has bolstered the crude underpinning Brent benchmarks. The ripple effects of this change are expected to persist for decades, fostering a healthier and more stable oil market.

Interestingly, the influx of WTI Midland has also affected North Sea producers and their ability to participate in so-called “chains.” These chains, a common practice in North Sea oil trading, facilitate the sale of actual barrels of oil between companies, bridging the gap between paper and physical markets. Previously dominated by Forties grade oil, the chains are now predominantly filled with WTI Midland, resulting in North Sea producers facing greater challenges in selling their cargoes.

In light of recent developments, bidding activity on Platts’s pricing window has intensified, with some instances of bids exceeding available sellers. Surprisingly, despite the active bidding, prices for major North Sea grades have remained relatively stable.

The inclusion of WTI Midland into the Brent benchmark has brought about a chain reaction, influencing not only trading dynamics but also pricing strategies and market participation. With a more diversified supply and increased liquidity, the oil market is now better equipped to weather price fluctuations and maintain a healthier balance between supply and demand.

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