For the first time, traders ranging from hedge funds to oil companies are making more use of Europe’s Brent futures market to hedge and speculate on the future direction of prices rather betting on WTI futures.
The trend was revealed in March trading data from the CME Group’s New York Mercantile Exchange and London’s ICE Futures Europe exchange.
While some physical crude streams have long been priced in reference to Brent, traders have favoured the deep and liquid US market since Nymex launched WTI futures in 1983.
But surging production from shale oil regions such as North Dakota has deposited a record high 50m barrels in tanks at Cushing, Oklahoma, the delivery point for WTI contracts, depressing prices. For the last three years, WTI has been discounted to Brent by between $5 and $28 a barrel.
Mihir Worah, who oversees more than $25bn in commodities investments for Pimco, the fund manager, said: “Over the last couple of years we’ve viewed Brent as the global oil benchmark and completely ignored what’s happening to WTI prices” as a guidepost to decisions on macroeconomics and inflation.
In March just over 14m Brent futures contracts were traded on ICE Futures Europe and the Nymex, compared to 13.1m WTI contracts. Brent volumes have remained higher than WTI so far in April. In March 2008, by comparison, 17.8m WTI contracts were traded, compared to 5.7m Brent contracts.
Brent futures have been adopted by airlines seeking to insure against price fluctuations and economists studying how energy costs influence growth. The US Energy Information Administration, Washington’s official oil forecaster, late last year ditched WTI and embraced Brent for its reference oil price, while Saudi Arabia stopped using WTI to price crude exports to the US in 2009.
The Brent market received a boost in 2012 when the Dow Jones-UBS commodity index, a basket of futures followed by $74bn, added it for the first time, drawing more index trackers into the market.
“Before Brent came into the index … we wouldn’t necessarily have had a core holding in Brent,” said Peter Kocubinski, who manages $150m as head of JP Morgan Asset Management’s commodity investment team. Now, “a percentage of the index has been made up of Brent and I would assume that along with us a lot of others have been increasing their open interest in Brent.”
The increasing popularity of Brent is a boon for IntercontinentalExchange, owner of the ICE futures exchange, where the most popular Brent futures contracts trades. WTI is still a larger market when measured by open interest, or the number of contracts outstanding, which this week notched a new record of 1.77m futures contracts on Nymex. WTI also dominates volumes in options on crude futures, though activity in Brent is growing rapidly.
Pipeline companies are racing to unclog Cushing, leading some traders to bet the gap between the two oil types will close. Mr Worah said: “Over the next year or two WTI is going to reconnect to the global marketplace, and then we’ll be left in the lucky situation of having two liquid benchmark oil contracts to trade.”
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