A Suite of Oil Benchmarks

WTI Brent

 

Though infrastructural challenges within the global oil industry are still being worked out, yearly forecasts outlined in the IEA’s monthly oil market report for June still show steady increases on both sides of supply and demand.

The big story remains in the U.S, where output has skyrocketed since the Midwest shale oil boom, and may reach record domestic production levels this year. Hydraulic fracturing and horizontal drilling have allowed for more efficient modes of crude oil extraction from U.S. soil, prompting the IEA to estimate that the United States will surpass Saudi Arabia as the largest global supplier of oil by 2020.

The U.S. oil production boom has caused a lot of movement in our futures market, causing West Texas Intermediate (WTI) to trade at points as low as $23/barrel below Brent crude this February. However, recent efforts to ease the surplus in Oklahoma and move U.S. shale oil toward coastal refineries have pushed up the price of WTI – the EIA report showing crude inventories dropped 9.87 million barrels last week confirms this –  , with the spread currently trading between $2-3/barrel, the narrowest the spread has been in nearly three years. The rebound contributed to two daily Open Interest records for our WTI futures contract in June, with June 7 closing at 1,799,167, and June 10 at 1,811,242 contracts.

Our Brent crude contract is also gaining more ground having broken three daily volume records in June, with the latest closing at more than 70,000 contracts traded on June 28. Recent growth in NYMEX Brent crude contract volumes have increased CME Group’s market share to over 7 percent, a record high that has more than tripled since the start of the year when our market share was at 2 percent.

A Financial Times story about our Brent market growth pointed out our market share in terms of our historical tie to WTI:

“Chicago-based CME has also softened its ambivalence towards Brent as its product attracts significant volume. The company’s New York Mercantile Exchange historically presented West Texas Intermediate futures as the world’s pre-eminent oil price yardstick since its launch in 1983.”

It’s true that we’ve long touted the benefits of WTI as a benchmark, and will continue to do so. But we are also constantly monitoring the needs of our customers, and are working to provide liquidity in all of our energy markets during periods of uncertainty and volatility in the industry.

As CME Group CEO Phupinder Gill pointed out in the Financial Times story, “There is more than one global benchmark. There is a suite of benchmarks that serve the world.”

We launched our Brent contract in 2011 to offer customers a hedging solution to manage their price risk, at a time when the Brent market was undergoing a significant transformation from the Platts 21-day to a 25-day basis. Customers have expressed strong interest in a transparently settled Brent futures contract that more closely reflects the hedging needs of the underlying physical Brent market. We provided that before anyone else, and we’re now seeing increased interest in both benchmarks.

We’re also seeing increased interest in the Dubai Mercantile Exchange’s Oman crude contract. In June,  DME Oman saw record trading volumes of nearly 7,000 contracts per day. The demand for oil in Asia is only going to continue to grow as more people join the middle class and purchase more cars. This kind of demand warrants an East-of-Suez benchmark, and DME Oman is in a good position to serve the marketplace. As DME CEO Chris Fix said last week:   

“It’s natural that the market will seek a benchmark, which is truly reflective of the economics of the Middle East and Asia.  This is why we see a great opportunity to develop the DME Oman contract further and expand our volumes: It meets the needs of producers and consumers in this region in the way a European benchmark like Brent simply cannot.”

About the Author

Gary Morsches is managing director of energy products at CME Group.