Riding the Wave: The Dated Brent benchmark at 30 years old and beyond
The unexpected shutdown of the Forties Pipeline System in early December sent a shockwave through the Northwest European crude markets. Not only had upstream producer Ineos only just taken control of operations from UK major BP after more than a year of negotiating around the sale, but the sudden absence of the region’s largest single crude stream brought long-simmering concerns about production stability in the region very much to the fore.
The FPS was closed for fewer than 25 days before Ineos got it repaired and back up and running, but its impact is expected to reverberate for the near future, as major stakeholders in North Sea production, Northwest European refining, the exchanges and the pricing agencies are expected to make tough decisions about the evolution of production and pricing in the region.
The Northwest European crude market today looks substantially different than the market looked when Dated Brent first ascended as the de facto global pricing benchmark, and the market of tomorrow is going to look even more foreign than the market of today. Not only is the quality of oil in the North Sea evolving — the newest, largest fields in the region are expected to be heavier, more sour and more acidic than the traditional light, sweet, low acid crude that has defined quality in the region for decades – but the growing dominance of Asia as an crude oil import region, and the US as a crude oil export region, has already started to change Northwest Europe’s position in the global crude markets.
Indeed, exactly what role Northwest Europe – and, by extent, Dated Brent – is likely to play in an increasingly globalized world remains to be seen, but it is evident that it will continue to play a key one. Europe straddles both the US and Asia, acting as both a crude export region as well as an import region, and its refineries – more vulnerable to the winds of product demand than the larger, newer plants in Asia, the Middle East and much of the US – have adapted by broadening the base of crudes they refine.
The North Sea has evolved an extraordinarily complex suite of trading instruments to manage the risk posed by global price volatility in one of the world’s most important commodities markets. Dated Brent stands firmly at the heart of this market, and remains so not because of to North Sea crude output, but because of its proximity to markets, its arbitrage potential, its trusted regulatory environment and its transparent price assessment mechanisms. North Sea production has never been equal to Saudi Arabia, Russia or the United States. However, as a pricing benchmark, it is second to none.