Commodities
Analysis-Promise of calmer markets as US oil wrests pricing power from Brent
© Reuters. FILE PHOTO: Crude oil storage tanks are seen from above at the Cushing oil hub, appearing to run out of space to contain a historic supply glut that has hammered prices, in Cushing, Oklahoma, March 24, 2016. REUTERS/Nick Oxford//File Photo
By Alex Lawler
LONDON (Reuters) – Increased exports of oil from the United States into Europe and Asia mean has snatched back its primacy in setting international pricing after North Sea (NYSE:) grades have for decades determined the value of the world’s most traded commodity.
The trend has calmed volatility and limits the potential for trading plays, known by traders as squeezes, that have on occasions distorted the established Brent oil benchmark, based on North Sea crudes, traders and industry insiders said.
A lack of volatility and of price distortion would be positive for consumers, stung by months of high inflation driven by energy prices. Some analysts also say the change has shifted power to U.S. companies and traders in the U.S. market.
Historically, U.S. West Texas Intermediate crude futures were the first widely accessible crude contracts launched on financial markets in 1983 until the Brent futures contract, launched in 1988, eventually gained prominence.
Its rise has been checked by declining volumes from ageing North Sea fields, while U.S. production has continued to rise as a result of the shale revolution that meant oil previously too difficult to extract could be released.
As a result, oil-index publisher S&P Global Commodity Insights, widely known as Platts, added the U.S. crude grade WTI Midland to the dated Brent benchmark from June deliveries and it often plays a role in setting its value.
“The introduction of WTI Midland into the North Sea basket has fast-tracked Midland from being a domestic crude…and rendered the U.S. grade the most important in the world, well currently anyway,” John Evans of oil broker PVM said.
Dated Brent is a part of the wider Brent complex that includes physical cargoes, swaps and the Intercontinental Exchange (NYSE:) Brent futures contract. Brent is used to price over three-quarters of the world’s traded oil.
Adi Imsirovic, director at consultant Surrey Clean Energy and a veteran oil trader who has written extensively on Brent, said the amalgamation of the two international benchmarks was positive.
“Brent is working just fine,” he said. “You’ve got the two major benchmarks in the world working in synch.”
CHANGED DYNAMICS
The extra supply underpinning the benchmark has reduced volatility in the spreads between monthly futures contracts, which previously have been distorted as traders sought profits, especially when a monthly contract expired.
Oil traders, speaking on condition of anonymity because they are not authorised to speak to the press, say the much larger WTI volumes available prevent price manipulation.
A senior executive at a major oil trader said the dynamic of Brent trading had changed “dramatically”.
Data from Kpler said the volume of WTI Midland flowing to Europe reached about 1.34 million barrels per day in July, before easing in August, far more than the typical output of the five North Sea crudes used in the benchmark.
The price of dated Brent is set by the cheapest of the six crudes. An S&P Global chart provided to Reuters shows Midland having a leading role in setting the value.
At the same time, volatility in the spread between the first- and second-month Brent crude futures contracts has decreased.
Previously, many of the companies that trade the crude, from trading houses such as Glencore (OTC:) and Vitol to refiners such as Shell (LON:), regularly built big positions that could lead to unusual patterns in related physical and derivative markets.
Although the practice did not breach any regulations, disputes have arisen, including a lawsuit, settled out of court, in which oil refiner Tosco alleged trading company Arcadia had gained a monopoly position in 2000.
Asked to comment on whether the potential for trading plays had decreased, Platts said one aim of adding more oil to any benchmark was to prevent “anomalous” price rises.
“We feel that Midland’s inclusion has been able to do that,” Joel Hanley, global director, crude and fuel oil, at S&P Global Commodity Insights, said.
POWER SHIFT?
Adding WTI to Brent has also redistributed market power, some analysts say.
Companies have firewalls in place to prevent oil traders receiving price-sensitive information.
However, traders have said that when Brent was based just on North Sea crude, companies that owned stakes in producing North Sea fields or in infrastructure, were better placed to have insight into developments that could move the market, such as outages or refinery maintenance.
“Now, the marginal powerful player is a U.S. supplier who has the knowledge of production/scheduling and shipping/port issues,” said Jorge Montepeque, who during decades working at Platts developed dated Brent.
“The power shifted and this is clearly seen when American companies who were not trading the North Sea in size suddenly rushed in.”
U.S. players, such as Occidential and Phillips 66 (NYSE:) have begun offering or bidding for WTI Midland cargoes that could set the dated Brent price, trade sources said.
Other U.S. oil companies ConocoPhillips (NYSE:) and Chevron (NYSE:) might become involved, two industry sources said. Conoco and Chevron declined to comment.
Platts said it has not seen a significant rise in U.S. companies entering the market.
LESS TRANSPARENT?
Every month, producers issue a list of the North Sea cargoes for export. There is no Midland programme because, traders say, no single company – or operator – is in charge, and several terminals supply cargoes.
Some traders say this has made the market less transparent. “We will get our cargo loading dates, but we won’t see all the loading dates at the terminal,” said a trading source.
An industry source said efforts were being made to address this by creating a loading programme for WTI.
Hanley of Platts, which told Reuters in April it did not see any problems around the lack of a programme, said adding WTI Midland into the Brent complex had already added transparency.
Imsirovic, the veteran trader, said historically some market players had always held advantages over others, but he predicted the benefits of the change would become more apparent.
“We have new players in the Brent market which is surely a good thing and we’ve widened the base of people involved,” he said. “That’s going to get even wider I think, over time.”
Thomson Reuters (NYSE:) competes with Platts in providing news and data about the oil market.
Investing.com– Gold prices hit a record high in Asian trade on Monday amid growing bets that the Federal Reserve will cut interest rates by a bigger margin later this week.
Reports of a second assassination attempt on Republican presidential nominee Donald Trump also spurred some demand for safe havens, although Trump appeared to be unharmed, and the assailant apprehended.
Asian trading volumes were somewhat limited by market holidays in Japan, China, and South Korea.
rose 0.4% to a record high of $2,589.02 an ounce, while expiring in December rose 0.1% to $2,613.70 an ounce.
Gold benefits from rate cut bets as Fed looms
A softer allowed for more strength in gold prices, as markets awaited a Fed meeting.
The central bank is widely expected to on Wednesday, although markets are split between a 25 or 50 basis point cut.
showed markets split exactly 50% over the two options, with bets on a bigger cut coming back into play on concerns over weakness in the labor market.
The central bank is also expected to kick off an easing cycle from this week, with analysts expecting at least 100 bps of rate cuts by the end of the year.
Lower rates bode well for precious metals, given that they reduce the opportunity cost of investing in non-yielding assets.
rose 0.4% to $1,004.80 an ounce, while rose 0.8% to $31.332 an ounce.
Trump assassination attempt spurs some safe haven demand
Gold saw some safe haven demand after reports of a second assassination attempt on Trump, this time at his golf course in Florida.
But secret service agents foiled the attempt in a reported shootout with the assailant, who was later apprehended by authorities. Trump was unharmed during the event, stating as much in a message on his fundraising website.
Copper prices steady after weak Chinese data
Among industrial metals, copper prices benefited from a softer dollar. But gains in the red metal were held back by a string of weak economic readings from China, the world’s biggest copper importer.
Benchmark on the London Metal Exchange rose 0.1% to $9,276.0 a ton, while one-month rose 0.1% to $4.2225 a pound.
A string of data released from China over the weekend showed and grew less than expected in August, while rose and fell.
The readings ramped up concerns over an economic slowdown in the country, which could bode poorly for its appetite for copper. But ANZ analysts said that the government could now have more impetus to release stimulus measures.
By Robert Harvey
LONDON (Reuters) -Oil prices edged higher on Monday as ongoing disruption to U.S. Gulf oil infrastructure balanced persistent demand concerns after a fresh round of Chinese data while investors await a likely cut to U.S. interest rates this week.
futures for November were up 46 cents, or 0.64%, at $72.07 a barrel by 1207 GMT. futures for October rose 52 cents, or 0.76%, to $69.17.
The market is likely to remain cautious until the Federal Reserve makes its interest rate decision on Wednesday, said Phillip Nova analyst Priyanka Sachdeva, adding that prices are still supported by some supply worries given that some capacity remains offline in the Gulf of Mexico.
Traders are increasingly betting on rate cut of 50 basis points (bps) rather than 25 bps, as shown by the CME FedWatch tool that tracks fed fund futures.
Lower interest rates typically reduce the cost of borrowing, which can boost economic activity and lift demand for oil.
However, a cut of 50 bps could also signal weakness in the U.S. economy, which could raise concerns over oil demand, said OANDA analyst Kelvin Wong.
Saxo Bank analyst Ole Hansen, meanwhile, said activity is likely to remain light ahead of the Fed meeting, adding that the outcome “looks like a coin toss between 25 and 50 bps”.
Nearly a fifth of crude oil production and 28% of output in the Gulf of Mexico remains offline in the aftermath of Hurricane Francine.
Weaker Chinese economic data released over the weekend dampened market sentiment, with the low-for-longer growth outlook in the world’s second-largest economy reinforcing doubts over oil demand, IG market strategist Yeap Jun Rong said in an email.
Industrial output growth in China, the world’s top oil importer, slowed to a five-month low in August while retail sales and new home prices weakened further.
Oil refinery output also fell for a fifth month as weak fuel demand and export margins curbed production.
Brent and WTI each gained about 1% last week but remain comfortably below their August averages of $78.88 and $75.43 a barrel respectively after a price slide around the start of this month driven in part by demand concerns.
Investing.com — Oil prices rose Monday, benefiting from ongoing disruption to U.S. Gulf oil production as well as a softer dollar ahead of an expected interest rate cut by the Federal Reserve later this week.
At 08:05 ET (12:05 GMT), rose 0.7% to $72.11 a barrel, while rose 0.8% to $68.30 a barrel.
Rate cuts in focus as Fed meeting looms
A softer was the biggest point of support for oil prices, as markets positioned for an from the Fed on Wednesday.
The central bank is likely to kick off an easing cycle, although traders are split over a 25 or 50 basis point cut.
Still, lower rates bode well for economic growth, which in turn could help keep U.S. fuel demand supported in the coming months.
Continued disruption in Gulf of Mexico
Also helping the tone was the continued disruption of production in the Gulf of Mexico following the arrival of Hurricane Francine.
Nearly a fifth of crude oil production and 28% of natural gas output in U.S. Gulf of Mexico federal waters remains offline, the U.S. offshore energy regulator said on Sunday.
Francine hit Louisiana as a Category 2 hurricane on Wednesday, eventually cutting power in four southern states.
Chinese economic data underwhelms
But gains were capped by persistent concerns over slowing demand, especially following a slew of weaker-than-expected economic data from China over the weekend.
and both missed expectations, while rose and fell.
The readings ramped up concerns that slowing economic growth in the world’s biggest oil importer will dent its appetite for crude.
Analysts at ANZ said Beijing was likely to roll out more stimulus measures to help support local economic growth, although they still expect gross domestic product to come below the government’s 5% target in the third quarter.
Concerns over China saw both the Organization of Petroleum Exporting Countries and the International Energy Agency slash their outlook for oil demand growth in the current year.
Holidays in China and Japan also kept trading volumes relatively slim.
(Ambar Warrick contribute to this article.)
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