ICE Brent

Brent is a waterborne crude. Until mid-2023, “Brent” referred to a basket comprised of five different North Sea crudes (Brent, Forties, Oseberg, Ekofisk, and Troll, commonly referred to as BFOET).

In June 2023, following June 2023 cargo deliveries, WTI Midland crude was added to the Brent basket and became part of the Brent complex. June 2023 cargo deliveries meant that WTI Midland was included in Dated Brent assessments starting in the calendar month of May 2023 (see further discussion below under “The addition of WTI Midland to the Brent complex”).

As a waterborne crude, Brent can be put on a vessel and shipped anywhere. Because of this, Brent reflects global oil market fundamentals and the global economy. This is reinforced by the fact that around 75% of the world’s traded crude is priced relative to Brent (directly and indirectly), including Dubai, Urals, and West African crudes.

Brent can be shipped and stored globally, either on land or in floating storage. As it has much more flexibility than WTI (Cushing) in terms of logistics and storage locations (see below), Brent is less prone to go negative.

Storage constraints for Brent

How much storage does Brent theoretically have access to? The International Energy Agency assessed global crude storage capacity in its monthly Oil Market Reports for April and May 2020. At that time, using various sources of data, the IEA estimated that including onshore storage (both commercial and government/strategic) and floating storage, there was 6.7 billion barrels of crude storage capacity in the world. For operational reasons, only around 80% +/- 5% was considered operational or working capacity; this works out to 5.0-5.7 billion barrels (mid-point of 5.35 billion barrels).

The IEA estimated that at the end of April 2020, there were 4.6 billion barrels of crude in storage globally, or 86% of operational capacity. That left 750 million barrels of global spare crude storage capacity remaining (relative to the mid-point). Aside from the IEA’s forecast that maximum operational crude storage capacity would be reached by mid-year, a key point of their analysis was that onshore storage could become filled locally before it reached that point globally. The IEA particularly warned about land-locked regions within North America or Russia - a dynamic that appears to have played out at Cushing (see below).

When storage approaches operational capacity, onshore storage fills first because it is cheaper. Floating storage is the last to fill as it’s more expensive and would hypothetically be the last available option to store Brent crude.

So how much floating storage was available to Brent? More than 1,300 large crude tankers or ~2.2 billion barrels of capacity were actively available in the global fleet, according to the IEA. Of this capacity, after taking into account vessels in-transit, loading, ballasting and vessels unavailable, the IEA estimated that at the end of April 2020, 120-125 million barrels of crude were stored at sea, and a further 130-155 million barrels of capacity were available for floating storage if economic conditions were met. It’s this flexibility that enabled Brent to more easily ride out a period of extreme shortages in storage capacity.

This greater scope of logistics and storage flexibility - including onshore and floating - means Brent was, and is, less prone than WTI (Cushing) to going negative. Based on analysis and reporting in the weeks following the NYMEX WTI (Cushing) negative pricing episode, this view was widely held among oil market analysts and traders.

How does the ICE Brent futures contract work?

The ICE Brent futures contract is a deliverable contract based on Exchange for Physical (EFP) delivery with an option to cash settle against the ICE Brent Index. This means that market participants have the option – but not the obligation – of taking physical delivery by using the EFP mechanism. This allows participants to swap a futures position for a physical one.

On contract expiry, ICE Brent futures prices converge with the physical Brent market through the ICE Brent Index. The ICE Brent Index “represents the average price of trading in the Reference Quality Crude Oil market in the relevant delivery month as reported and confirmed by the industry media. Only published full cargo-size (700,000 barrels) trades and assessments are taken into consideration in the calculation.”

The EFP mechanism together with the ICE Brent Index ensures that the ICE Brent futures market remains linked with the physical Brent market. It ensures that the fundamentals driving the physical market are translated into the futures contract expiry price. In other words, if a market participant is left with a long or short futures position on expiry, the ICE Brent Index ensures that the expiry price for the cash-settled contract is the value at which physical Brent is trading.

The addition of WTI Midland to the Brent complex

The Brent complex has been evolving for decades. Similar to earlier changes in its history, the addition of WTI Midland to the Brent basket was driven by declining output in North Sea crude grades. Additional crude volumes were necessary to add volumes to physically underpin the Brent benchmark.

The addition of WTI Midland to the Brent complex in May 2023 has been widely considered to be successful. Regarding the impact on pricing, from May 2023 through July 2024, WTI Midland was the most competitive grade that set the price of Dated Brent approximately 50-60% of the time. This was broadly similar to expectations that existed before the change.

Regarding the impact on physical volumes, before WTI Midland was added, less than 10 cargoes of BFOET (the old basket) traded per month in the Dated Brent Market on Close (MOC) window. From June 2023 through July 2024, an average of 11 cargoes of Midland per month traded in the Dated Brent MOC window. In other words, with the addition of Midland, volumes have significantly increased. Again, this was broadly similar to expectations.

How is WTI Midland different from WTI Cushing?

It is important to note the differences between WTI Midland and WTI Cushing. WTI Midland is a different crude grade, with different quality, origin and pricing location. WTI Midland is Midland-origin and Midland-quality crude. WTI Midland is of a significantly higher quality than WTI Cushing crude: it is lighter, sweeter, and has a lower metal content.

In contrast, WTI Cushing, or US Domestic Sweet (DSW), quality can be met by blending crudes, including Canadian crude and Permian extra light or condensates. WTI Cushing has “dumbbell” crude quality issues. This is refining industry jargon for crude that produces too much “light ends” (light products) and too much residual fuel oil, and not enough of the gasoline and middle distillates that refiners prefer to make and sell.

It is noted that as a pricing location, Cushing, Oklahoma does not reflect the US; it reflects the midcontinent region. In contrast, the Houston area is the key pricing location in the US because it reflects both domestic US refining demand and export demand to Europe and Asia. WTI Midland crude is part of the global waterborne market.

The ICE Midland WTI (HOU) contract is a physically deliverable futures contract for WTI Midland barrels with exchange-guaranteed quality that meets the Platts Midland WTI spec priced in Houston. Since the addition of Midland WTI to the Brent complex in June 2023, HOU volumes have risen from 5,000 contracts per day and 5,000 lots of open interest to over 20,000 lots a day and over 140,000 lots of open interest. In addition, physical deliveries, both via the HOU contract and through the EFP mechanism, have been gaining momentum. This surge in HOU trading activity has been driven by demand for both price and supply risk management for the growing volumes of Midland crude produced and exported for processing by refiners in the US, Europe, and Asia. Further details and analysis of the ICE Midland WTI (HOU) contract are planned for publication.