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US Government to replace WTI for crude oil prices benchmark

EIA to adopt North Sea Brent crude oil as benchmark

US Government energy agency, the Energy Information Administration (EIA) published in its annual energy out look its decision to replace the historical West Texas Intermediate (WTI) crude oil traded on New York Mercantile Exchange by the European Brent listed on the Inter Continental Exchange (ICE).

The EIA is an independent division of the US Department of Energy.

The EIA must not be confused with the International Energy Agency (IEA) established in 1974 by the oil consumer countries of the OECD to supervise the oil market in response to the first oil recession and the creation of the OPEC organizition.

The American EIA made this decision in considering that the WTI did not reflect any longer the crude oil barrel price paid by the refineries in USA.

Up to 2010, the WTI in New York and the Brent in London were closing connected, following each other.

Since the last quarter 2010, the WTI and the Brent started to diverge with the WTI declining slowly compared with the Brent.

Since October 2012, the difference between the WTI and the Brent exceeded constantly the $20 per barrel.

On January 1st 2013, the commodity index, S&P GSCI will also adjust its basket in decreasing the weight of the WTI and increasing the  Brent.

Many reasons have motivated the EIA to proceed with this evolution which started already years ago.

World to produce and consume more heavy crude oil

By definition the WTI had been selected as a mix of the Texas light crude oil that has been the base of the US oil consumption for a century.

Unfortunately since 2010, the world is trading more heavy crude than light crude because of the depletion of the best quality fields.

In 2011, even Saudi Arabia was producing more heavy crude than light crude.

In that respect the Brent index from the North Sea is closer to the actual crude oil traded in the world.

In parallel, the development of the pipeline system between Canada and USA, contributed to overhelm with crude oil supply the Cushing hub in Oklahoma where the WTI is traded.

In opposite way the pipeline infrastructure to export this crude oil from Cushing to the Gulf of Mexico is insufficient to transport the crude for export.

The consequence is to trap the crude oil in the domestic market, thus to lower the prices independently from the global market.

The last point which contributed to defeat the WTI in favor of the Brent is the campaign of the oil and gas companies to revamp and upgrade their refineries.

Step by step all the countries enforce new regulations to introduce low sulfur and high efficiency transportation fuels.

Since all the refineries had to be revamped and upgraded to improve the quality of the output, most of the companies decided to invest a bit more capital expenditure to give more flexibility on the input side in order to accept a broader range of crude oils as feedstock.

As a result of the conjunction of independent events, the depletion of the fields, the pipelines infrastructure in the USA, new regulations contributed to drive down the WTI in volume and in price while the Brent appeared instead as the most reliable indicator of the global crude oil market.

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1 Comment to “US Government to replace WTI for crude oil prices benchmark”

  1. Many people believe oil prices cannot sustain above $55 a barrel, with global production responding first and foremost in U.S. OPEC’s deal was targeted more at reducing global inventories and not seeking higher prices.

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