U.S. light crude has served as the oil benchmark for quite some time, but Brent could overtake it when the S&P GSCI Index raises its Brent weighting and slashes WTI on January 1 of the new year.
Brent has been making gains steadily, having gained the favor of major investors around the world. Its futures and options have consistently gone up as increased liquidity caused a parallel decrease in the fortunes of West Texas Intermediate (WTI).
Things fall into perspective when you consider that this year, the average volume for Brent ICE futures has exceeded NYMEX WTI trading by more than 30,000 lots per day, CNBC reports.
Although total WTI futures lead Brent, Brent isn’t far behind and could overtake WTI in early 2013.
Brent options have risen more than 300 percent this year.
“Even U.S. mid-sized producers have begun switching from WTI to Brent in their hedging programs,” said Jack Kellett, the head of oil at inter-dealer broker GFI Group.
Brent seems to indicate the world health of the oil spot market much more accurately than WTI, Again Capital’s John Kilduff told CNBC. Of course, increased production of oil throughout North America has sent U.S. crude prices into a tailspin—especially in the Midwestern U.S., where WTI is priced. The problem is exacerbated by insufficient pipeline networks.
And WTI suffers from several additional problems. For one, it’s landlocked. That caused Saudi Arabia to toss WTI for a mix of Gulf of Mexico crudes.
For another, every time the first WTI futures month expires, investors must buy a more expensive one the next month. By contrast, the front month for Brent is actually priced higher than subsequent months, something called a positive roll yield.
Beginning January 1, the GSCI will reduce WTI by 6.25 percent (down to 24.71 percent) and raise Brent by 3.99 percent (up to 22.34 percent).