Brent Beats WTI Oil Trading as ICE Eclipses Nymex

Brent Beats WTI Oil Trade as ICE Eclipses Nymex
A reversal of the Seaway pipeline by Enbridge Inc. and Enterprise Products Partners LP allowed more oil to be pumped out of Cushing to the Gulf Coast on May 19. Photographer: Shane Bevel/Bloomberg

For the first time, London is overtaking New York as the global hub for trading oil futures.

More contracts in North Sea Brent crude changed hands in June than at any time on record, data from the ICE Futures Europe exchange show. It was the first full quarter and fourth consecutive month in which Brent trading on London’s ICE surpassed West Texas Intermediate oil on CME Group Inc.’s New York Mercantile Exchange.

The trend underlines London’s resilience as a financial center in the face of Europe’s sovereign debt crisis and supports Brent’s status as the benchmark grade for pricing more than half of the world’s oil. While North Sea output has fallen almost 50 percent in the past decade, a glut of landlocked North American crude has reduced WTI’s reliability as a gauge of global fuel demand.

“When you look at Brent, you’re looking at the geopolitical situation in the Middle East and North Africa,” said Martin Arnold, a senior research analyst at ETF Securities Ltd., which listed the world’s first exchange-traded commodity product for oil in 2005. “It responds with a greater magnitude to those global issues” than the U.S. grade, which reflects “domestic factors rather than global developments,” he said in a telephone interview from London on July 27.

Volume Surge

The average daily volume for ICE Brent futures rose 17 percent in June to a record 716,752 contracts, an increase that helped Intercontinental Exchange Inc. to report an 18 percent gain in second-quarter net income yesterday. Trading in WTI, Nymex’s flagship contract, climbed 6 percent in June to 599,674 lots, with CME Group reporting a 17 percent decline in profit for the same quarter.

Data released this week by the exchanges show July Brent futures trading volume at 13.13 million lots versus 10.87 million for WTI.

“Since April of this year ICE Brent volumes have for the first time consistently exceeded CME WTI and by a big distance,” said David Hufton, managing director of PVM Oil Associates Ltd., a London-based crude and fuels broker that handles futures and over-the-counter contracts for more than 100 million barrels a day.

As Europe’s banking capital, London has been hurt as the region’s debt crisis has deepened, with jobs in the city’s financial districts forecast by the Centre for Economics & Business Research Ltd. to drop to a 16-year low this year. Its reputation was further tarnished last month when Barclays Plc, the U.K.’s second-biggest bank, was fined a record 290 million pounds ($456 million) for rigging interbank lending rates, leading to the resignation of Chief Executive Office Robert Diamond and calls for tougher industry regulation.

Funds Adjust

Traders in Asia, the fastest-growing energy market, track North Sea crude because it’s a closer match to the value of exports from the Middle East. That’s prompting exchange-traded funds and commodity indexes used by investors such as pension funds to allocate Brent a bigger share in their mix of holdings, according to Andrey Kryuchenkov, an analyst at VTB Capital, the investment-banking unit of Russia’s second-biggest lender.

“Big funds are readjusting their allocations in favor of Brent,” Kryuchenkov said in a July 27 interview from London. “People are piling up cash into Brent driven by expectations for Asian demand and geopolitics in Iran and Libya because it is more globally relevant.”

Standard & Poor’s has increased Brent’s weighting in its GSCI Index of 24 raw materials for the past four years, raising it to 17.35 percent this year from 13.68 percent in 2009. It cut the proportion of WTI to 30.25 percent from 39.75 percent over the same period. The Dow Jones-UBS Commodity Index included Brent for the first time this year.

Index Weightings

“The index weights have increased for Brent and decreased for WTI, reflecting the hedging demand growth for Brent,” Jodie Gunzberg, the New York-based head of commodity indexes at S&P Dow Jones Indices, said in a July 31 e-mail.

While Brent has remained easily accessible to traders, the U.S. production boom has combined with a lack of outbound pipelines from Cushing, Oklahoma, the delivery point for WTI futures, to create an inventory glut that’s widened the price difference between the two grades. WTI traded at an average discount of $15.53 to Brent since the start of 2011, compared with 76 cents in 2010.

“Because Brent is seaborne, it can reach any market in the world by ship, reinforcing its global relevance and thus, trading activity in ICE Brent futures and options,” David Peniket, president and chief operating office of ICE Futures Europe, said in a July 31 e-mailed response to questions.

Oil for September settlement dropped 6 cents to close at $105.90 a barrel in London, down 1.4 percent this year. New York futures lost $1.78 to $87.13 a barrel, taking this year’s decline to 12 percent.

Open Interest

Open interest, the number of contracts that have not been closed, also signal Brent’s growing status. Open positions in Brent have risen for five years and grew 35 percent from December to June, versus WTI’s 9 percent gain over the same period. Open interest in U.S. futures was 1.45 million contracts in June, exceeding Brent by 271,431 lots.

By some measures, the U.S. benchmark is still the world’s biggest, taking into account the array of WTI futures contracts traded on both the Nymex and ICE exchanges. In options, WTI’s volumes were more than four times those of ICE Brent in June.

“Nymex WTI offers the deepest liquidity, largest open interest, and tightest bid-ask spread of any crude oil benchmark in the world,” Gary Morsches, managing director of energy products for CME Group in New York, said in an e-mailed response to questions July 31.

Seaway Saga

A reversal of the Seaway pipeline by Enbridge Inc. and Enterprise Products Partners LP allowed more oil to be pumped out of Cushing to the Gulf Coast on May 19. The 500-mile (805-kilometer), 30-inch line will initially be able to deliver 150,000 barrels a day, rising to more than 400,000 in the first quarter of 2013, the companies said in a June 18 statement.

“With the reversal of the Seaway pipeline, and the exploding growth of transportation of oil over rail, Nymex WTI is now flowing from Cushing to the refiners along the U.S. Gulf Coast, re-establishing the correlation between WTI and waterborne crudes,” the CME said.

For all Brent’s accessibility, maintenance at North Sea oil fields and pipelines can curb supplies. Work this summer may push prices for the earliest-delivery futures higher this September and October, according to Olivier Jakob, managing director of Petromatrix GmbH, a researcher in Zug, Switzerland.

North Sea Declines

Combined oil production from the U.K. and Norway was 3.1 million barrels a day in 2011, 47 percent less than 10 years earlier, according to statistical data compiled by BP Plc.

Shipments of Brent, Forties, Oseberg and Ekofisk grades which make up the North Sea benchmark known as BFOE, will be 774,194 barrels a day this month, the fewest in five years and 49 percent less than the record high of 1.53 million barrels a day in October 2007, according to data compiled by Bloomberg.

Chinese state-run Cnooc Ltd. said last month it plans to acquire Canadian energy producer Nexen Inc., a move that would give it control of Buzzard, the U.K.’s largest oil field and the biggest contributor to the Forties stream. Intercontinental Exchange CEO Jeff Sprecher said on an earnings conference call yesterday that new investment by China would assist the “longevity of future oil production from the North Sea.”

Backwardation, Contango

Brent’s appeal to investors has also risen because of the premium, or backwardation, of near-term futures relative to later supplies. That gives traders a profit as they roll over their front-month holdings before expiry into later contracts. Brent was in backwardation for all but two weeks this year and for most of 2011.

WTI futures typically traded in the reverse structure, or contango, since 2008, which results in a loss as investors sell front-month futures and buy deferred contracts.

If an investor took a long position, or bet that Brent prices would rise, in January 2005 and rolled the contracts a day before expiry, he would have earned $1.87 for every dollar invested at the close on July 26 this year, according to PVM calculations. A WTI position over the same period would have gained 58 cents for every dollar invested, PVM said.

“The greater tendency of Brent to go into backwardation facilitates long-only positions which tend to be the ones the hedge funds go for,” David Wech, head of research at JBC Energy GmbH in Vienna, said in an e-mailed response to questions. “Rolling-over in a contango market is simply costly.”

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