Paul Wightman
AT A GLANCE
- Beginning in June, U.S. grade WTI Midland will become one of the deliverable crude oils used as one of the streams in the Dated Brent pricing mechanism
- Russian crude oil exports to the EU fell to 1.4 million barrels per day in November 2022, while U.S. crude exports to the region grew to more than 1.5 million barrels per day
The volume of U.S crude oil being exported to Europe has risen sharply in recent months and looks set to remain high as the region deals with the shortage of Russian crude oil following the EU ban on crude imports. A price cap on Russian crude oil has also been imposed by members of G7 group of countries further complicating the supply situation for European refiners with many turning to alternative suppliers.
The rise in the volume of U.S crude oil looks set to partially offset any decline in Russian crude oil that is sold into the region. Total U.S crude exports to Europe reached 1.75 million barrels per day in 2022, a rise of around 70% over 2021 levels. The volume of U.S crude being shipped to Europe looks set to ensure that WTI-linked derivatives continue to play a significant role in the global crude oil trade.
WTI Midland Flows Into Brent
The North Sea market is undergoing changes, in part due to the declining volumes of crude oil within the current basket of crude oils for Brent, Forties, Oseberg, Ekofisk and Troll (BFOET). Beginning in June 2023, the U.S. grade WTI Midland will become one of the deliverable crude oils into the Brent forward contract and used as one of the crude streams in the Dated Brent pricing mechanism. The Brent forward contract consists of the trading of cargoes of 700,000 barrels of any of the BFOET streams (including WTI Midland) for delivery beyond the month ahead, with no specific dates assigned for loading. At the point the holder of a forward contract notifies a buyer of specific loading dates and which crude cargo is being loaded, the cargo is deemed to have moved from the forward to the Dated Brent market.
The inclusion of WTI Midland as a deliverable crude oil into the forward Brent contract has generated greater interest in the U.S crude oil market and all the associated derivatives markets linked to NYMEX WTI crude futures.
WTI Midland Offsets North Sea Declines
Production in the North Sea market has been falling since 2016 and there have been numerous attempts to bolster the amount of available crude oil for delivery into the forward cash Brent contract and ultimately to underpin the Dated Brent benchmark (into which the forward Brent converges).
Based on the latest data from the U.S Energy Information Administration (EIA) and Bloomberg, the total volume of U.S crude exported to Europe in October 2022 was around 865,000 barrels per day more than the volume loaded at the existing North Sea crude terminals for the grades that underpin the Brent contract.
WTI-Linked Derivatives Draw Trader Interest
Trading in the WTI-linked derivatives has been increasing in recent months ahead of the change to include WTI Midland. Contracts have been traded as far ahead as December 2026 for WTI Houston and December 2025 for the WTI Midland. The total level of open interest across the Midland and Houston contracts, a good measure of the success of a contract, reached 300,000 contracts at the end of December 2022, an increase of 60,000 lots over the past 12 months.
Traders are increasingly looking to manage any associated price risk to the underlying markets through the trading of the listed futures markets listed at CME Group. Trading interest in the WTI and U.S. grades markets is coming from trading firms, producers and refiners on both sides of the Atlantic.
The total volume of WTI Midland crude oil futures vs. benchmark WTI futures averaged 52,000 lots per month in 2022, doubling the volumes seen in 2021. Over the same period, monthly traded volumes of WTI Houston futures have reached just under 74,000 lots per month, up from around 62,000 lots per month in the prior 12-month period.
Europe Turns to U.S and Saudi Exports
The volume of Russian crude exports to Europe has fallen in recent months ahead of the sanctions imposed in December 2022. The International Energy Agency (IEA) noted in their November 2022 report that Russian crude oil imports had fallen to 1.4 million barrels per day. At the same time, U.S. crude exports to the EU surpassed this level reaching 1.55 million barrels per day based on October 2022 U.S EIA data. U.S crude accounts for around 12% of EU refinery processing volumes, the IEA noted in its latest November 2022 report.
Source: Bloomberg/Bruegel data
The chart above shows the volumes of Russian crude oil imports into Europe by week and compares the 2022 levels with one year prior. Since September 2022, the Bloomberg/Bruegel data clearly shows a sharp decline in the volume of Russian crude arriving into European ports.
European refiners have also been stepping up purchases of other crude streams and some of the Middle Eastern exporters have been able to increase exports to the region. S&P Global Platts noted that Saudi Arabian exports to Europe increased steadily in 2022. Total exports from Saudi Arabia year to date October 2022 reached around 600,000 barrels per day, the highest level since 2019.
Source: S&P Global and Kpler
Trading Interest in U.S Crude to Remain
European refiners have processed greater volumes of WTI-linked crudes in 2022 and this looks set to continue into 2023 and beyond.
An expanded role for WTI means more North Sea crude oil traders and the wider market will price either directly or indirectly against it, growing the influence of U.S. crude oil around the globe.