To defend USD trade dominance, the strongest U.S. oil benchmarks must be prioritized

Jeff Barbuto, Senior Vice President, Global Head of ICE Oil Markets

A key element underpinning the U.S.’s reserve currency status is its operation of the world’s most sound and open financial markets - including oil.

Most of the world’s oil trade is conducted in U.S. dollars. Here, strategic competitors in China, Russia, and the broader BRICS bloc are actively pursuing alternatives to reduce their dependence on the greenback. This shift is not just economic but deeply geopolitical, as these nations seek to safeguard against sanctions risks and assert greater economic sovereignty.

China and Russia have taken tangible steps to reshape oil trade. Bilateral energy transactions are increasingly conducted in rubles and yuan, while China’s introduction of yuan-denominated oil futures contracts provides oil exporters with a credible alternative to the dollar. There has even been discussion of a “petroyuan” initiative that could involve major oil producers, including Saudi Arabia. Such moves signal a significant pivot that could gradually erode traditional U.S. dollar dominance in oil markets.

The challenge is compounded by internal factors that risk diminishing the U.S.’s influence over global crude pricing. Over the past 15 years, the NYMEX West Texas Intermediate (WTI) benchmark at Cushing, Oklahoma has seen a steady loss of share in global futures markets, from 62% in 2017 to 40% today, in favor of ICE Brent.

This erosion is largely attributable to the shale-driven increase in U.S. crude production and exports, persistent infrastructure bottlenecks, and the surge in Canadian crude imports. As a result, WTI Cushing is no longer representative of crude fundamentals in the US: the center of pricing has shifted from the midcontinent to Houston on the Gulf Coast, where U.S. oil is exported to the world.

To defend U.S. dollar dominance, focus must be placed on more relevant benchmarks: Brent and Gulf Coast markers like ICE’s Midland WTI (HOU), a futures contract pricing and delivering Permian Basin production directly in Houston. Supporting this shift has vital price implications for buyers. Pricing Midland directly using HOU, compared to pricing it relative to Cushing, has been $0.21 per barrel cheaper for refiners over the last 18 months.

With direct access to the water, HOU’s pricing reflects both U.S. refining demand and export demand to Europe and Asia. Permian producers are exposed to the price of Midland WTI in Houston where it meets the global market; as a result, ICE Midland WTI sees three times as much volume going to delivery as NYMEX WTI (Cushing) each month, verifying that traders value the right crude grade at the right location.

HOU also offers traders access to an exchange-guaranteed Midland WTI barrel that is deliverable into the Brent complex. The inclusion of Midland WTI crude oil in the Brent complex - used to price ~75% of physically traded global oil - has further elevated its benchmark status. Midland WTI now sets the price of Dated Brent ~50% of the time, making it an effective hedge for the contract.

Yet outdated industry practice means most Midland on the Gulf Coast is still priced as a differential to Cushing, so that trading and hedging within the U.S. is fraught with unnecessary price risk and additional fees. If market participants priced directly at Houston, these inefficiencies would be eliminated, U.S. refiners could realize lower input costs and the U.S.’s status as one of the leading marketplaces for trading and pricing crude oil will begin to recover.

As trade tensions simmer between the U.S. and China, preventing any slippage of the U.S.’s grip on global oil pricing is imperative. If moves by Russia and China and the efforts of BRICS nations succeed in establishing viable alternatives, the dollar’s dominance in global energy markets could be further eroded.

For policy advisors such as the U.S. Energy Dominance Council, migrating domestic oil pricing towards ICE Midland WTI and promoting robust international participation in dollar-based contracts should be added to their mandates. These measures would reinforce the integrity of U.S. oil benchmarks against non-dollar pricing schemes - supporting a Midland contract that is recognized as the most accurate marker for U.S. crude pricing.

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