The most consequential spread in the global crude oil market is the arbitrage, the WTI/Brent price differential. After all, they are the two leading crude oil pricing benchmarks. Several million barrels of crude oil are priced off them every day. Exporters of the U.S. crude oil marker to regions where Brent is the main benchmark would hedge themselves by buying the arbitrage(i.e., buying WTI against Brent). Importers would take the opposite action as they would be buying on a Brent-related basis, while their selling prices would be based on WTI.
Because of the U.S. crude oil export ban up until 2015, there was a one-way traffic of crude oil into the United States. With the emergence of the U.S. shale industry and the growing energy independence, lifting the ban promoted WTI to a truly international status as a marker. In an ever-evolving market, the steadily rising production of crude oil in the U.S. coincided with falling outputs in the North Sea, the home of Brent. To provide liquidity and a fair and transparent pricing method, the major price reporting agency decided to include WTI Midland in the Brent basket, further signifying the importance of the U.S.-based crude oil in global trading.
The increasing pertinence of WTI on the international stage led to rising volumes and open interest and called for a standardized CME Group contract that offers an easily accessible and cheap hedging tool for U.S. exporters and importers of crude oil. This tool, the WTI/Brent spread (CL/BZ), the arbitrage has been gaining popularity, particularly since WTI Midland became a component of the Brent basket in June 2023. As illustrated in the chart above, the rise in WTI/Brent average daily volume has been unbroken over the past 18 months with the exception of holiday-related retreats in trading activity. This trend is set to continue because of the prominent role WTI now plays in the global crude oil trade. The increased demand for the U.S. benchmark will also ensure that any occasional weakness in the value of arbitrage precipitated by temporary or weather-related storage and supply bottlenecks will be viewed as a more than tempting buying opportunity for the WTI/Brent spread.
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All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
