U.S. crude is playing a bigger role in pricing global oil
U.S. crude is playing a bigger role in pricing global oil
A couple of months ago, we told you about a change to what’s known as the Brent benchmark. In energy circles, that benchmark is kind of a big deal. It’s used to determine the price of the vast majority of oil traded around the world.
Until May, it was set using five Northern European grades of oil. But some of those supplies are declining, so a grade of American crude oil was added. Some argue that is giving the United States a bigger role in setting the global price of oil.
The addition of West Texas Intermediate-Midland crude to the Brent benchmark had an immediate impact on global oil prices, said James Gooder, vice president at the consultancy Argus Media.
“They are much more tightly linked to prices at the U.S. Gulf Coast. Basically, if the U.S. Gulf sneezes, we all catch the cold. If U.S. Gulf prices go up, then Brent prices will go up by the same amount. It’s a very clear relationship,” Gooder said.
That’s because Brent’s price is determined by the cheapest kind of crude in the basket, he said.
“U.S. crude at the U.S. Gulf Coast — plus the cost of shipping it to Europe — that’s your basis price now. It’s not just what anybody will pay for North Sea crude. So it changes the game. It changes the dynamic,” Gooder said.
And so, since May, “if you really want to understand whether crude prices are going up or down, and if so, why, then instead of looking at Europe, you need to look at the United States,” he said.
Gooder estimates that the addition of American oil to the Brent benchmark, which now tops $80 a barrel, has brought the price down by somewhere between 20 cents and 80 cents.
It’s hard to nail down what the exact impact is, said David Garza, managing director of Gunvor USA.
“It could be 30 [cents], it could be 50 cents. Maybe it’s 80 cents, but that’s not a lot,” he said.
Garza said the softer oil prices we’ve seen of late have much more to do with something else.
“I think it’s a demand issue,” he said, adding that much of the world economy is struggling, “whether we’re in a recession or semi-recession or other things globally.”
The real impacts of adding American crude to the Brent benchmark might not be dramatic now.
But as more of it becomes available in a world market known for its wild price swings, “then you’re not going to see as much volatility,” said senior market strategist Eli Tesfaye of RJO Futures, because the Brent benchmark is now influenced by a more stable source.
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