U.S. Oil Trading Set to Surpass Brent as Shale Boosts Clout

Updated on
Low Oil Prices Force Industry Efficiency: Skip York

Trading volume in New York oil futures is overtaking London’s Brent as the shale boom bolsters the U.S. benchmark’s clout in global crude markets.

The aggregate daily volume of West Texas Intermediate futures traded on the New York Mercantile Exchange averaged about 840,000 contracts in the first five months of the year, up 46 percent from the 2014 average, according to bourse data compiled by Bloomberg. That’s more than about 705,000 for Brent traded on the ICE Futures Europe Exchange.

The shale boom that drove U.S. output to the highest in more than three decades has bolstered trading in WTI as the influence of American oil on global supply increases. While Brent volumes are also rising, WTI is benefiting the most amid the most volatile prices since 2009.

“Now the price of U.S. crude oil is very important for the global balance,” said Olivier Jakob, the managing director of Zug, Switzerland-based Petromatrix GmbH. “It will have an impact on crude oil production in the U.S. and the U.S. is really the swing producer now.”

WTI daily volumes exceed 1 million when contracts traded on London-based ICE as well as mini futures and other products on Nymex are taken into the account, data compiled by Bloomberg show. Brent contracts are also bought and sold on CME Group Inc.’s Nymex.

Surging output from shale formations such as the Eagle Ford in Texas and the Bakken in North Dakota are reducing the need for imports into the U.S., boosting the availability of oil elsewhere. That’s increasing competition among rival producers including OPEC and contributing to a global glut that drove prices almost 50 percent lower in 2014.

U.S. Drillers

The Organization of Petroleum Exporting Countries has responded by pumping more as it seeks to defend market share and force higher cost producers, including American shale companies, to cut output. That’s increasing the focus on U.S. prices as they help determine the pace of drilling.

WTI’s effectiveness as a price benchmark was cast in doubt as it fell more than $27 a barrel below Brent in 2011. Pipeline constraints and rising Canadian supply had led to a glut at Cushing, Oklahoma, the delivery point for the futures.

The gap has since narrowed to an average of about $6 a barrel this year, after the southern leg of TransCanada Corp.’s Keystone XL pipeline allowed oil to move from the Cushing hub to refineries along the Gulf of Mexico coast.

“The two benchmarks serve their function as price discovery for different markets,” said Petromatrix’s Jakob. “Crude oil is still being priced out of Brent.”

WTI futures for July delivery rose 6 cents to $60.03 a barrel on Nymex at 1:36 p.m. Singapore time on Wednesday. Brent for August settlement on ICE added 4 cents to $63.74.

The Chicago Board Options Exchange Crude Oil Volatility Index has averaged about 47 this year, the highest level since 2009. The gauge measures hedging costs on the U.S. Oil Fund, the largest exchange-traded fund tracking crude futures.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE