Bloomberg News

Brent Poised to Depose WTI as Most-Traded Oil Futures

November 26, 2012

Brent Poised to Oust WTI as Most-Traded in Oil

An offshore gas platform stands in the North Sea near Bergen, Norway. Brent, produced in the North Sea, is gaining favor among traders. Photographer: Chris Ratcliffe/Bloomberg

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 every 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. Prices have climbed 34 percent in the past two years, reflecting everything from war in Libya to the embargo on Iran. WTI, the main grade in the U.S., has risen 9 percent as the nation, which prohibits crude exports, has struggled to clear a glut at Cushing, Oklahoma, the delivery point for Nymex futures.

“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.”

Peak Transactions

Transactions in Brent peaked at 1.18 million lots a day on June 21 as prices fell below $90 a barrel for the first time since December 2010. Volumes of WTI reached a record of 1.47 million on Jan. 28, 2011. Each contract is for 1,000 barrels.

By some measures, WTI remains ahead. Open interest, the number of contracts that have not been closed, remains 30 percent higher for the U.S. futures at 1.5 million lots this year, compared with 1.16 million for Brent, data from the exchanges show. That underscores its continued importance for world markets, according to Doug King, the co-founder of the Merchant Commodity Fund, which invests about $250 million.

If the WTI volumes that are also registered on ICE’s exchange are added to those on Nymex, the U.S. grade remains the more widely-traded. Combined WTI volumes on ICE and Nymex have averaged 704,152 lots this year.

The ascent of Brent futures turnover is a boon for Atlanta-based Intercontinental Exchange Inc., which owns ICE Futures Europe and competes with Nymex parent CME Group Inc. in Chicago for dominance in energy derivatives trading.

Index Adjustments

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 re-weight 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.”

U.S. Fracking

U.S. oil production rose for an 11th week through Nov. 16, the longest stretch of gains since at least 1990, as horizontal drilling and hydraulic fracturing, known as fracking, unlock resources in North Dakota, Texas and Oklahoma. Output climbed to an 18-year high of 6.71 million barrels a day, the Energy Department said Nov. 21. The 1975 Energy Policy and Conservation Act, enacted two years after the Arab oil embargo, prevents U.S. companies from exporting crude without government permission.

WTI’s discount to Brent will narrow next year with the expansion of a pipeline that transports crude from Cushing to refineries in Texas and Louisiana, according to Greg Sharenow, who co-manages $30 billion of commodity investments at Pacific Investment Management Co. in Newport Beach, California.

The Seaway pipeline, operated by Enbridge Inc. (ENB) and Enterprise Products Partners LP (EPD:US), will be able to send 400,000 barrels a day from Cushing to the Houston area from Jan. 1, compared with 150,000 a day now, Enterprise Chief Executive Officer Mike Creel said on Nov. 13.

WTI Relevance

“The global importance of WTI will increase significantly, commensurate with this expanding physical growth and distribution,” Bob Levin, CME (CME:US) Group’s managing director for energy, research and product development, said in an e-mailed statement. “WTI will reflect the relevant fundamentals, which are transparently provided on a weekly basis by the U.S. government.”

Prices for Brent crude have advanced 3.5 percent this year on ICE, buoyed by the loss of supplies resulting from the European Union’s embargo against Iran and concern that tension in the Middle East will trigger a wider output disruption. WTI has retreated 11 percent. Brent for January settlement slid 19 cents, or 0.2 percent, to $111.19 a barrel at 1:37 p.m. today on the ICE exchange in London while WTI dropped 44 cents to $87.84 on the Nymex.

An unprecedented flow of North Sea crude was shipped to South Korea in the first half of this year after the EU signed a free-trade accord in July 2011 with the Asian nation, further supporting the European marker.

Brent has averaged $111.91 a barrel this year, and WTI $94.78, putting the North Sea marker closer to the average price of a basket of crudes sold by the Organization of Petroleum Exporting Countries, at $109.74.

‘Shift Into Brent’

“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.”

The U.S. crude contract was inaugurated in 1983 on the Nymex, which is now part of CME. Brent derivatives followed five years later on the International Petroleum Exchange, which was later acquired by ICE.

While the price of WTI will probably appreciate relative to Brent over the next 12 months, the contract itself has lost its relevance as a marker for global oil markets, Pimco’s Sharenow said by phone Nov. 20.

“When we talk about asset allocation, when we talk about the overall impact of oil on inflation, and all these sort of things, we’ve been talking about Brent as the price of oil,” Sharenow said.

To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net

To contact the editor responsible for this story: Stephen Voss on sev@bloomberg.net


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