The global oil market has seen a significant change in the past year, as Brent crude oil, the most widely used benchmark for oil prices, has incorporated U.S. WTI Midland crude into its basket of grades. This move, which took place in May 2023, has added more volume and diversity to the Brent benchmark, making it more representative of the global oil supply and demand.
Why Midland matters
Midland crude is a light, sweet oil that is produced in the Permian Basin, the largest and most prolific oil-producing region in the U.S. It is also a key grade for the U.S. Gulf Coast refining complex, which has a high demand for light, low-sulfur crudes. Midland crude is similar in quality to the other Brent grades, such as Brent Blend, Forties, Oseberg, Ekofisk and Troll, which are sourced from the North Sea.
By adding Midland crude to the Brent basket, the Brent benchmark has increased its liquidity and stability, as well as its relevance to the global oil market. According to Platts, the commodities pricing agency that oversees the Brent benchmark, the integration of Midland has gone “smoothly” and has brought new participants to the Brent trading environment, such as U.S. oil company Occidental and Saudi Aramco.
How Brent is calculated
The Brent benchmark is calculated by using a weighted average of the prices of the six grades that make up the basket. The weights are based on the production volumes of each grade, as well as their quality differentials. The Brent benchmark is also adjusted for the time value of money, as the grades have different delivery dates and locations.
The Brent benchmark is used as a reference price for about two-thirds of the world’s oil trade, as well as for hedging and investment purposes. It is also the basis for many oil derivatives and contracts, such as futures and options. The Brent benchmark is published daily by Platts and other agencies, such as ICE and Argus.
The outlook for Brent
The Brent benchmark is expected to remain stable and robust in the coming years, as the global oil market gradually recovers from the impact of the pandemic and the Russia-Ukraine war. The Brent benchmark is forecasted to average $82 per barrel in 2024 and $79 per barrel in 2025, according to the U.S. Energy Information Administration.
The Brent benchmark is also likely to benefit from the growing demand for low-carbon and renewable energy sources, as the world transitions to a more sustainable and resilient future. The Brent benchmark is aligned with the goals of the Paris Agreement and the UN Sustainable Development Goals, as it reflects the environmental and social costs of oil production and consumption.
It is not only a reliable and transparent price indicator but also a catalyst for innovation and collaboration in the global oil industry. By adding Midland crude to its basket, the Brent benchmark has shown its ability to adapt and evolve with the changing market conditions and customer needs.
Source: Reuters
