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U.S. crude oil export surge signals shifting global benchmarks

The United States is exporting record volumes of crude oil, a new trade that is not only helping to reduce the country's trade deficit but is also shifting the balance of market power in energy terms toward the West.

The confirmation came this month when the United States' Energy Information Administration signalled in its weekly report that crude-oil exports had doubled to one million barrels a day. Only a decade ago, barely any U.S. barrels found their way beyond the country's borders. Oil terminals and refineries on the U.S. Gulf Coast were then unloading vast quantities of crude from West Africa and the Middle East, but today, the trade in liquid energy is substantially rebalancing, with exports of gasoline and diesel to Latin America and crude oil to refineries in Canada's Eastern Provinces and to Western Europe.

Just as the United States' shale oil producers were enjoying an export surge, across the Atlantic, a major oil company was preparing to dismantle the massive infrastructure of a previous oil boom. Royal Dutch Shell has published plans to decommission the Brent platforms. Three of the huge offshore structures, which once produced a tenth of the North Sea's output, are idle, and Shell has hired a giant vessel to lift Brent Delta's 24,000-tonne steel topside off its 170-metre high concrete legs and carry it to a scrapyard.

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Oil from the Brent fields, discovered by Shell in 1971, rescued Europe from high oil prices during the Arab oil embargoes, just as the U.S. shale-oil revolution killed off the $100 (U.S.) barrel of crude in 2014. During their lifetimes, the Brent fields produced two billion barrels of oil. The huge volumes, high quality and proximity to refineries made Brent an oil brand and the price at which cargoes changed hands became a benchmark against which crudes were valued, not just in Europe but in Africa, Central Asia and the Arabian Gulf.

For decades, Brent has been the global benchmark price for crude oil. Its rival, West Texas intermediate, a blend of oil produced onshore in the United States and delivered to a pipeline hub in Oklahoma, became a regional price benchmark, its landlocked status only deemed relevant to supply and demand in the United States. For traders buying and selling cargoes from Azerbaijan to Angola, it made more sense to set the price against a benchmark crude that was loaded offshore in the North Sea and could be delivered any time, anywhere.

All that may be about to change. Faced with Brent's rapidly diminishing output, oil-price assessment agencies, such as Platts, have added oil produced from other British North Sea fields, including Forties as well as Norwegian oil fields Oseberg and Ekofisk, in order to maintain the viability of the benchmark. This week, Platts indicated that a third Norwegian field, Troll, will be added, but oil-price analysts reckon that these are just temporary solutions. In the longer term, the Brent price may become a blended-oil price of cargoes of crude delivered to the port of Rotterdam, Netherlands from oil fields in Africa, such as Nigeria's Bonny, or similar light crudes from the Caspian region.

While the Brent benchmark struggles to maintain its credibility, the United States is reclaiming the global-benchmark crown, reckons Sean Cronin, analyst at Argus Media, the energy pricing agency. "There is a new dynamic, the American market is evolving very quickly. WTI is becoming the de facto global benchmark price."

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Instead of a landlocked benchmark reflecting domestic U.S. demand, the Gulf ports in Texas and Louisiana are importing and exporting oil, creating a hub for buying and selling oil and oil products on a vast scale and in international markets.

There is little prospect that the United States will be challenged soon for its emerging dominance in oil markets. The speed with which shale-oil producers have sought to fill the gap left by the Organization of the Petroleum Exporting Countries's recent decision to curb supply shows that the United States has the capacity to make the market in oil. It will not just satisfy internal demand, but it can act as a swing producer, curbing price surges. Meanwhile, banks and hedge funds have taken the cue; open interest in the light sweet crude futures contract on the New York Mercantile Exchange is gaining ground on its rival, ICE Brent (Intercontinental Exchange), an indication that those seeking to hedge energy costs, or just speculate price, are beginning to see WTI as a global benchmark.

The United States' oil resurgence may eclipse faster than we imagine, but its success as a trading hub is more sustainable as long as the world's largest producer, Saudi Arabia, refuses to allow its crude to be traded by third parties. Likewise, efforts to replace the Brent benchmark with the trade of Asian and African crudes on a Rotterdam platform may founder over concerns that output will be disrupted by war and sabotage. For markets to work, they need more than the promise of delivery; they need to be seen to be delivering.

Carl Mortished is a Canadian financial journalist based in London.

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About the Author

Carl Mortished is a Canadian financial journalist and freelance consultant based in the U.K. With a career spanning investment banking, journalism and consulting for global companies, he was for many years a financial writer and columnist for The Times of London. More


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