Brent replacing WTI as benchmark crude?

Sam Fletcher
OGJ Senior Writer

The Dow Jones-UBS Commodity Index said Apr. 7 North Sea Brent crude oil “will be specifically considered for the index” beginning in 2012. This is the second largest commodity index after the S&P Goldman Sachs Commodity Index (GSCI) and is for now only invested in West Texas Intermediate futures.

“With the increasing liquidity in Brent futures, we can also expect the S&P GSCI [published by Standard & Poor’s] to increase further its crude allocation to Brent,” said Olivier Jakob at Petromatrix, Zug, Switzerland. “Hence the reweighing of those two indices from WTI to Brent should put some significant pressure on the first quarter values for WTI-Brent at the start of 2012, with some prepositioning likely before the actual roll-date.”

At KBC Energy Economics, a division of KBC Advanced Technologies PLC, analysts also noted the ICE Brent crude contract in Britain is about to topple US benchmark light crudes on the New York Mercantile Exchange as the most traded crude futures contract. “Since the start of the uprising in Libya on Feb. 15, speculative length in NYMEX crude futures has risen by 60% to 262,000 contracts at Mar. 29,” they said. “Even the laggardly NYMEX crude futures contract has since risen…so net speculative length is likely to have hit a new all-time high.”

KBC analysts claimed, “The flood of money into oil futures and other asset classes has been encouraged by ultra-loose monetary policies. Net investment into US commodity indices rose above $300 billion for the first time in February, with an increase of some 15-20% over the preceding 3 months. The strong upward trend is likely to continue through June with the US Federal Reserve expected to complete its $600 billion stimulus program under the second round of quantitative easing. Only about one-third of the implied geopolitical risk premium in current prices is discounted by December 2012 when the ICE Brent contract is priced at $114.49/bbl. This would imply a protracted period of high oil prices for which there is no precedent.”

Oil prices rose Apr. 7, with the May contract for benchmark US light, sweet crudes up $1.47 to $110.30/bbl on NYMEX and the May IPE contract for North Sea Brent crude was up 37¢ to $122.67/bbl, after the European Central Bank announced a 0.25% hike in interest rates. “The widely expected hike is unlikely to derail the upward trend in the oil price, with the US Federal Reserve System still firmly on the path of accommodative monetary policy,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group.

In addition, the ECB, “while not committing yet to it, is leaving open the possibility of further increases in rates,” said Olivier Jakob at Petromatrix, Zug, Switzerland. This provided some support to the euro-dollar exchange rate and by default to commodities.

High prices destroy demand
KBC analysts said, “Not only will Europe’s ongoing debt problems and the European Central Bank’s decision to hike interest rates for the first time since 2008 understandably dampen European consumers’ appetite for oil, but also the persistently inflated level of oil prices will increasingly deter all but the most robust consumption trends.”

They noted, “The price of front-month Brent crude settled close to $115/bbl on most trading days in March except for a short-lived slump to below $110/bbl in the aftermath of the massive earthquake in Japan. However, over the past week, the contract has moved up sharply…. More than $7/bbl has been added in just five trading sessions and, more importantly, resistance has been broken at $120/bbl.”

The primary driver of higher oil prices “is a growing perception in the market that the conflict in Libya might not end any time soon.” KCB analysts also said, “Oil prices have been driven higher by rising geopolitical concerns with unrest in Bahrain, Yemen, and Syria, together with upcoming elections in Nigeria, Africa’s biggest oil exporter.”

(Online Apr. 11, 2011; author’s e-mail: samf@ogjonline.com)

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