While in the Americas, WTI crude remains the benchmark for pricing, a number of U.S. based hedgers use Brent due to its global fundamental relevance, and also since it is internationally arbitraged to U.S. refined oil product exports and oil imports. Since U.S. refined product exports and oil imports are not constrained by pipeline infrastructure, or restrictions on exporting U.S. crude, Brent futures are used as effective hedging tools. Below is a map that shows the widespread influence of Brent oil in benchmark pricing.
Might this mean a greater opportunity for producers to hedge? Recently, the Brent curve has collapsed from bearish secular trends for the Atlantic Basin and Asia imports from West Africa. However, this puts pressure on Middle East suppliers to cut back. So there are both bull and bear pressures on Brent, making it likely range-bound – but conceivably at a lower range. More disruptions are possible and only a major one, probably from the Middle East might offset more production, especially from Saudi Arabia. Though influences from new refinery capacity in the Middle East may substitute crude supplies with products. On the upside in the short term, production growth in Lybia and Iraq is unlikely to grow fast enough to surpass disruptions from Nigeria and Venezuela.
This article was written by Jodie Gunzberg, global head of commodities, S&P Dow Jones Indices.
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