Brent benchmark faces Texas challenge

Trading volumes of WTI futures exceeded Brent crude in 2017 by the largest margin in at least seven years

Surging shale oil production in Texas and North Dakota is being felt on trading desks in Chicago, Houston and New York, where a brisk business in West Texas Intermediate crude futures is far outpacing contracts for London-based Brent crude.

As the US approaches a record 10.04 million barrels of daily production, trading volumes of so-called “WTI” futures exceeded volumes of Brent crude in 2017 by the largest margin in at least seven years. A decade ago, falling domestic production and a US ban on exports meant that WTI served mostly as a proxy for US inventory levels.

“There was a time when the US was disconnected from the global market,” said Greg Sharenow, portfolio manager at PIMCO, who co-manages more than $15 billion (Dh55 billion) in commodity assets.

Two changes drove the resurgence of the US benchmark. One was the boom in shale production, which spawned a multitude of small producers that sought to hedge profits by trading futures contracts. Then two years ago, the United States ended its 40-year ban on crude exports, making WTI more useful to global traders and shippers.

US exports averaged 1.1 million barrels a day through November 2017, rising to an average 1.6 million bpd in the final three months. That compares to just 590,000 bpd in 2016.

As US production and exports grow, global firms that increasingly buy US oil are offsetting their exposure by trading in US financial markets. That also gives US shale producers more opportunity to lock in profits on their own production.

The US boom has reignited a competition over oil trading that began in the 1980s between two of the world’s biggest exchange operators — Intercontinental Exchange, and the New York Mercantile Exchange, or Nymex, which was acquired by Chicago-based CME Group in 2008.

For ICE and CME, energy represents the second-biggest source of revenue, trailing only stocks and interest rate trading, respectively. ICE is based in Atlanta, but is known for its European contracts after it bought London’s International Petroleum Exchange and its Brent futures contract in 2001.

About 310 million US crude futures contracts, worth about $16 trillion in oil, changed hands on CME’s New York Mercantile Exchange (NYMEX) in 2017, far more than the about 242 million contracts in Intercontinental Exchange’s Brent crude futures.

‘Clear trend’

Energy products including WTI brought in $790 million in revenue for CME in 2016, the latest annual data available. Brent crude futures and options alone contributed nearly $300 million to ICE’s revenues in 2016.

Since 2011, trading volumes in WTI futures have risen by about 135 million contracts, compared to an increase of about 109 million in Brent, according to exchange data.

CME has said there is a “clear trend” that the US benchmark is being used more globally, in part because of growing production there and relatively stagnant output of the North Sea crude grades that underpin Brent trading.

That makes investors more likely to trade in WTI than Brent, said Owain Johnson, managing director of energy research and product development at CME.