The world’s oil-price benchmark is being radically reformed
The article discusses the radical reform of the Brent crude oil price benchmark, which is considered one of the most important indicators in the global oil market. The Brent benchmark, used to price a significant portion of daily oil transactions, futures contracts, and even influence tax rates and economic decisions, has been facing challenges due to dwindling transactions in the North Sea oil field from which it derives its name.
To address this, Platts, a price-reporting agency, is making changes to the benchmark by including transactions of West Texas Intermediate (WTI) Midland crude, an American oil similar in quality to Brent, in the calculation of the benchmark's price. This marks the first time that oil from outside the North Sea region will be included in the Brent benchmark. The goal is to improve liquidity and prevent potential market disruptions that could arise from insufficient transactions in the North Sea.
While there are concerns about potential issues such as Midland dominating the benchmark or benefiting specific marketmakers, the initial acceptance of the change and the inclusion of new players, like Koch Industries, indicate positive reactions to the reform. However, the article points out that the move to reform the benchmark was initiated by a price-reporting agency, raising concerns about potential future tinkering and questions about the benchmark's stability.
The article concludes by drawing a parallel with a historical incident in the potato-futures market and warns that mishandling the Brent benchmark reform could have significant repercussions for the global oil market.
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