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Analysis-Promise of calmer markets as US oil wrests pricing power from Brent

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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.

Commodities

Canadian wildfire reaches Jasper, firefighters battle to protect oil pipeline

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(Reuters) -A wildfire reached the Canadian town of Jasper, Alberta on Wednesday, one of hundreds ravaging the western provinces of Alberta and British Columbia, as firefighters battled to save key facilities such as the Trans Mountain Pipeline, authorities said.

Wildfires burning uncontrolled across the region include 433 in British Columbia and 176 in Alberta, more than a dozen of them in the area of Fort McMurray, an oil sands hub.

The pipeline, which can carry 890,000 barrels per day (bpd) of oil from Edmonton to Vancouver, runs through a national park in the Canadian Rockies near the picturesque tourist town, from which about 25,000 people were forced to evacuate on Tuesday.

“Firefighters … are working to save as many structures as possible and protect critical infrastructure, including the wastewater treatment plant, communications facilities, the Trans Mountain Pipeline,” Parks Canada said in a post on Facebook (NASDAQ:).

The pipeline operator did not immediately respond to a Reuters request for comment, but said earlier it was safely operating the pipeline and had deployed sprinkler protection as a preventive measure.

In the day’s last update, Jasper National Park said it could not report on the extent of damage to specific locations or neighbourhoods, and that it would provide further updates on Thursday.

Canadian Prime Minister Justin Trudeau said his government approved Alberta’s request for federal assistance.

“We’re deploying Canadian Armed Forces resources, evacuations support, and more emergency wildfire resources to the province immediately – and we’re coordinating firefighting and airlift assistance. Alberta, we’re with you.”

The town, and the park, which draws more than two million tourists a year, were evacuated on Monday night, at a time when officials estimated there were 15,000 visitors in the park.

© Reuters. Smoke rises from the Lower Campbell Creek wildfire (K51472) wildfire northwest of Beaverdell, British Columbia, Canada July 24, 2024.   BC Wildfire Service/Handout via REUTERS.

Deteriorating air quality forced firefighters and others lacking breathing equipment to evacuate to the town of Hinton, about 100 km (62 miles) away, park authorities said on Facebook on Wednesday evening.

Officials of Parks Canada earlier said they expected rain to arrive overnight.

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Gold prices slide as safe haven plays favor yen; Copper losses deepen

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Investing.com– Gold prices fell in Asian trade on Thursday, seeing little safe haven demand despite increasing risk-off sentiment as traders rode a sharp appreciation in the Japanese yen. 

A rout in broader commodity markets also raged on, with copper prices extended a sinking to a near four-month low amid persistent concerns over top importer China. Weak readings on manufacturing activity from the U.S., Germany and Japan also soured copper’s outlook. 

slid 0.9% to $2,376.11 an ounce, while expiring in August tumbled 1.7% to $2,375.40 an ounce by 00:52 ET (04:52 GMT). 

Gold prices retreat as safe haven plays, rate hike bets favor yen 

The yellow metal saw little safe haven demand even as global markets experienced a sharp drop in risk appetite, with traders pivoting into the Japanese yen. The yen’s pair, which gauges the number of yen needed to buy one dollar, sank to an over two-month low on Thursday. 

The yen benefited from an unwinding in short positions over the past week, following suspected currency market intervention by Tokyo. But speculation over a potential interest rate hike by the next week also benefited the yen, especially as recent data signaled some resilience in the Japanese economy. 

Gold and metal markets took little advantage of a drop in the dollar, which retreated before a slew of key U.S. economic readings in the coming days. data for the second quarter is due later on Thursday, while data- the Federal Reserve’s preferred inflation gauge- is due on Friday. 

Other precious metals also retreated. slid 1.1% to $949.60 an ounce, while tumbled 4.2% to $28.098 an ounce, unwinding a bulk of their recent rally.

Copper losses deepen amid demand jitters 

Among industrial metals, copper prices fell further on Thursday, facing increased selling pressure amid concerns over a slowdown in global demand. 

Benchmark on the London Metal Exchange slid 1.6% to $8,960.50 a tonne- breaking below $9,000 for the first time since early-April. One-month fell 0.6% to $4.0540 a pound.

Both contracts were nursing steep losses in recent sessions, amid growing concerns over demand in top importer China, following a string of underwhelming economic readings from the country.

Concerns over a demand slowdown were furthered by weak manufacturing activity data from the U.S., Japan and Germany, which showed industrial activity was on the backfoot.

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Oil down $1 as muted Chinese consumption outweighs inventory draws

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By Noah Browning

(Reuters) -Oil prices fell on Thursday as demand signals from lacklustre Chinese consumption outweighed the previous day’s data showing large draws on U.S. inventories.

futures for September fell $1.01, or 1.2%, to $80.70 a barrel by 1117 GMT. U.S. West Texas Intermediate crude for September slid $1.2, or 1%, to $76.67.

Both benchmarks rose on Wednesday, snapping consecutive sessions of declines after the Energy Information Administration said inventories fell by more than expected to 3.7 million barrels last week. [EIA/S]

U.S. gasoline stocks dropped by 5.6 million barrels, against analyst expectations of a 400,000 draw.

“Despite draws in U.S. crude and gasoline stocks, investors remained wary about weakening demand in China and expectations of advancing ceasefire talks between Israel and Hamas added to pressure,” said Hiroyuki Kikukawa, president of NS Trading, owned by Nissan (OTC:) Securities.

China’s oil imports and refinery runs this year have trended lower than in 2023 on weaker fuel demand amid sluggish economic growth, government data shows.

“Growing concerns over the strength of oil demand in the short to medium term have acquired a strong grip on market sentiment,” said Vandana Hari, founder of oil market analysis provider Vanda (NASDAQ:) Insight.

In the Middle East, efforts to reach a ceasefire deal to end the war in Gaza between Israel and militant group Hamas have gained momentum over the past month. A breakthrough could erode lingering threats to supply and send prices lower.

The U.S. Federal Reserve, meanwhile, is expected to cut interest rates only twice this year, in September and December, according to a Reuters poll of economists, with resilient U.S. consumer demand prompting a cautious approach despite easing inflation.

© Reuters. FILE PHOTO: An aerial view shows a crude oil tanker at an oil terminal off Waidiao island in Zhoushan, Zhejiang province, China January 4, 2023. China Daily via REUTERS/File Photo

Lower interest rates should spur economic growth, leading to more oil consumption.

In Canada, hundreds of wildfires are burning in the western provinces of British Columbia and Alberta, including in the area of oil sands hub Fort McMurray.

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