Canary CEO: Restore WTI as global oil price benchmark

Crude oil, arguably the most valuable commodity in the world, is essential to modern life. It serves as the building block for almost everything from gasoline to guitar strings. It is also, like other commodities, governed by the theory of supply and demand. Price should be good for both producer and buyer.

But since there is no single type of oil, there is no single, worldwide price for it either. The unrefined petroleum pumped from the ground varies widely by region and crude stream; when it comes to the key characteristics that define crude oil quality and value — density and sulfur content — the product flowing from Mexico (which is heavy and full of sulfur) is about as far removed from the Malaysian type (light and almost sulfur-free) as the two countries are from each other on the map.

In the 1980s, in order to simplify buying and selling crude in the international marketplace – and guarantee pricing transparency, the industry established benchmarks, a sort of pricing reference point. The two primary benchmarks are Brent crude and West Texas Intermediate, or WTI; nearly 200 more lightly traded references also exist.

Brent comprises light, sweet production from the North Sea and is used to price oil traded in Europe, Africa, Australia, and parts of Asia – roughly two-thirds of the world’s volume. WTI prices US production as well as crude from Canada, Mexico, and South America. Talking about the price of oil is talking about the spot price of a barrel of one of the benchmark crudes.

“With expanded logistics at American oil trading hubs improving refinery access to domestic crude, and a supply-based rally raising WTI prices toward the US$50 per barrel mark, it is time to reestablish WTI as the world’s oil price benchmark,” explained Canary, LLC CEO Dan K. Eberhart.

Before 2011, Brent and WTI prices were closely aligned, with Brent prices typically trading at a slight discount to WTI, about US$1.50 less, meaning WTI had a slim global advantage. In 2011 and 2012, however, a glut of sweet, light domestic crude overwhelmed takeaway capacity at US storage facilities. The build-up put so much downward pressure on WTI pricing that the relative positions of the benchmarks flipped; instead of WTI, Brent became the global oil price benchmark. But more significantly, the gap between the two benchmarks became more like a crevasse: at one point, WTI traded at US$20 per barrel less than Brent.

Recently, though, WTI has been on the rebound and the difference between the two benchmarks has narrowed again. In May, a mere US$.20 per barrel separated them.

“The fact is, even before the price decrease, or the Brexit, the four fields in the North Sea that constitute Brent crude – the eponymous Brent, Forties, Oseberg, and Ekofisk – are literally drying up,” Eberhart added.

First exploited in the 1970s, they are mature fields where production fell from 420,000 barrels per day in 2009 to 260,000 barrels per day in 2014. The fields supplying Brent crude have long been in decline, but now, with the price drop and WTI-related shale levels increasing, drilling projects beyond 2017 are drying up.

In contrast, during roughly the same period, US production doubled to more than 9.43 million barrels per day, largely on the strength of new shale development. Shale will continue to alter the supply side of the world’s energy equation, particularly since the US lifted its 40-year ban on crude oil exports. Couple that with increasing demand in India and Asia, especially among the Association of Southeast Asian Nations (ASEAN), that can be met by North American crude traded on WTI, and it becomes increasingly clear that Brent may no longer be the best choice as the basis for global oil pricing.

Canary, LLC, is now one of the largest private wellhead service companies in North America after seven decades and 10 acquisitions in the industry.