LONDON (Reuters) – The expiry of the June contract for Brent oil futures in Europe on Thursday will possibly be the most watched event in oil markets for some time after the U.S. benchmark plummeted below zero for the first time in history last week.
The coronavirus pandemic has killed oil demand as over four billion people are in lockdown and last week, ahead of its contract expiry, U.S. West Texas Intermediate (WTI) futures crashed deep into negative territory making it a liability for anyone holding it.
Analysts and investors have been wondering if the same will happen to Europe’s Brent oil futures, but most agree that while there are no technical obstacles for the contract going the same way, it is hard to see why it would.
Brent is considered to be the international marker by the oil industry as it is linked to seaborne crude so has fewer storage limitations than WTI, which is settled against a major landlocked storage site in Oklahoma.
Brent is run by the Intercontinental Exchange (ICE) in Europe and other crudes are unofficially pegged to it, so there is more vested interest in keeping it stable.
Nevertheless, last week, ICE said it was ready to switch mathematical models, from Black-76 to Bachelier, to settle contracts at negative prices if needed.
HOW DO BRENT OIL FUTURES WORK?
* Brent oil futures are indirectly linked to the physicaloil market, specifically the oil pumped out of the depths of theNorth Sea. * The contract takes its name from the Brent oilfield offthe Shetland Islands. * It is a cash settled contract rather than a contract thatis settled with a physical cargo of crude. * If a market participant holds the contract to expiry, ICEuses the ICE Brent Index as the final cash settlement price. * The Index is published by ICE on the day after expiry.WHATIS THE ICE BRENT INDEX? * The Index represents the average price of trading in theNorth Sea forward market, also known as the cash market, in therelevant delivery month on expiry day. * The forward market consists of physical North Sea cargoesthat trade before producers of those grades issue their monthlyloading programmes. * The Index specifically follows five crude grades: Brent,Forties, Oseberg, Ekofisk and Troll. * Forward trades of these cargoes are tracked and theirprices published by commodity pricing agencies like S&P GlobalPlatts and Argus Media. * These grades are also used to set Dated Brent – a physicalbenchmark used to price most of the world’s crude deals.
BRENT FUTURES CLOSE IN ON PHYSICAL MARKET
* The record disconnect between Brent futures and thephysical market has narrowed considerably since mid-April,making a total collapse less likely. * The spread between Dated Brent and Brent futures hasnarrowed to around $5 a barrel from $8 to $9 a barrel. * Dated Brent was more than $11 a barrel cheaper thanfutures earlier in the month. * “The arguments that Brent crude won’t go to negativeprices are solid. Crude oil in the North Sea is produceddirectly onto ships which then can sail all around the world andutilise the last remaining pockets of free inventories,” BjarneSchieldrop, chief commodities analyst at SEB, said. * “Brent is not immune to a negative pricepossibility…Overall, however, Brent should be more resilient,”Louise Dickson, oil market analyst at consultancy Rystad Energy,said. * “There are also fewer players with a vested interest inseeing Brent collapse – Saudi and Russian crudes are bothunofficially pegged to Brent, for example. WTI is mostlyaffecting the U.S. interests, so if that collapses competingcountries benefit.”
(Reporting by Julia Payne;Editing by Elaine Hardcastle)