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Brent Bolsters Position as Price Anchor

Copyright © 2021 Energy Intelligence Group

Fears that global oil price benchmark Brent could fall apart and drop below zero like its US counterpart have not materialized. Brent was cruising in mid-$30s this week after a brief dip below $20 per barrel in late April. Brent, despite flaws, has shown to be a sturdy price anchor in a sea of pandemic turmoil (PIW Apr.24'20). An Energy Intelligence analysis of global trade flows shows that nearly two-thirds of the world’s crude spot trades are linked to Brent -- and that matters since this is where physical prices get discovered, especially in times of duress. Spot trade also links to the electronic exchanges, which ultimately decide the oil price for all to see. The world produces 80 million barrels per day of crude oil and 45 million b/d gets exported, the Energy Intelligence analysis shows. The trade data is extracted from Energy Intelligence's World Crude Oil Data. Of the exports, 27 million b/d is sold under term contracts from producers like Saudi Arabia, Kuwait and Iraq, and 18 million b/d in the spot market, with producers like Norway, the UK, the US and Angola. Brent added 500,000 b/d in 2019 and now covers 11 million b/d of the spot market -- a whopping 63%, versus 22% for Oman/Dubai and 9% for US West Texas Intermediate (WTI). Brent guides prices for crudes from the North Sea, the Mediterranean, the US and Brazil, but also streams from West Africa and Asia are taking their lead from the basket of crudes -- Brent, Forties, Oseberg, Ekofisk and Troll -- that set the price for spot cargoes of dated Brent. When Nymex WTI traded at minus $40/bbl last month, the oil market appeared on the brink of collapse. Exchanges and traders were racing to allow oil trading systems to actually show negative prices, including for Brent and other products (PIW May1'20). But those systems were never tested in real time as Brent on ICE Futures never followed Nymex WTI into the red (PIW May15'20). The seaborne crude had a key advantage over landlocked WTI: surplus oil could escape the hub. Brent's falling production and dwindling volume of trades are an issue (PIW Feb.27'17). But the system worked under the worst conditions imaginable. Physical Brent fell to around $10/bbl while the exchange still traded $20/bbl. The big discounts were a boon for big traders (PIW May8'20). The discounts also paid for the surplus to go into storage. Producers followed the price signals and lowered supplies. Brent and most of the crudes linked to its pricing system are waterborne -- and always have the sea as an outlet in times of surplus. That explains why floating storage is up a massive 115 million barrels since early March (related). With oil demand growth shifting eastward over the past decade, Mideast marker Oman/Dubai has become the most popular instrument for pricing term contracts. Even though Asia has been actively looking to create its own alternative to Brent, not much has come of it. The Dubai Mercantile Exchange (DME), the most serious contender, has attracted the interest of regional producing governments, most notably Saudi Arabia, but not more trade (PIW Jul.23'18). The price for Oman and Dubai remains essentially a differential to Brent. If the Mideast would trade more spot crude and link a paper market to it, it could create an alternative to Brent -- and hold China at bay for determining the price of oil. Although China has its own issues. The new Shanghai commodity exchange is a playground for retail investors and not yet the pricing hub for its imports that it was designed to be. The DME has attracted heavyweight support from Saudi Arabia, Kuwait, Dubai, Oman and also Bahrain but contract open interest and trading volumes are a fraction of Brent of Nymex WTI. Now it is the United Arab Emirates trying to create a regional benchmark. The UAE plans to build a crude storage facility of 42 million bbl with a benchmark based on light and medium, sour Murban, the country's 1.5 million b/d key export grade. Instead of building out the DME, the UAE now bets on competitor ICE Futures to come and create contract volumes. But plans are pushed off for pandemic and regulatory reasons. Brent Grabs More Spot Crude Exports 2019 Chg. From 2018 ('000 b/d) Spot Term Total Spot Term Total Brent 11,400 7,200 18,600 500 -500 0 WTI 1,600 3,600 5,200 400 0 400 Asci 400 1,800 2,200 0 -200 -200 Oman/Dubai 4,000 12,400 16,400 100 -200 -100 Other 800 1,900 2,700 0 -400 -400 Totally Traded 18,200 26,900 45,100 1,000 -1,300 -300 Total crude oil produced in 2019 is 80 million b/d. Total

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