FORTY years ago America, still reeling from the 1973 oil crisis, banned most exports of crude oil. That prohibition was lifted by Congress in mid-December. The first shipment under the new rules set sail on December 31st from the Texan port of Corpus Christi. The renewed flow of crude is already changing how oil is priced.
Not all barrels of oil are alike. Crudes can be viscous like tar or so “light” they float on water. Their sulphur content ranges from the negligible (“sweet”) to the highly acidic (“sour”). Though hundreds of grades are bought and sold, traders use a handful of benchmarks to make sense of the market. Brent, from the North Sea, is the current international standard. Americans prefer to use a similar grade known as West Texas Intermediate (WTI).
WTI was once the main global benchmark. It has a number of advantages over Brent. For one thing, it arrives at the delivery point—Cushing, Oklahoma—by pipeline, and so can be sold in batches of variable size. Brent, in contrast, can only be sold by the tankerload. As Brent sees fewer, bigger transactions, generating continuous prices is tricky. The ever-shifting price of WTI can be observed directly, making it more transparent. And Brent is umbilically connected to a declining oil province. It comes from only a handful of oilfields, whereas a WTI contract can be satisfied by any suitable oil delivered to Cushing.
WTI had one vital flaw, though. The export ban meant that it could detach from world oil prices if America produced more crude than expected, since the surplus could not be exported. For most of the late 20th century that risk was hypothetical, as America’s output steadily declined. But in recent years the shale-oil boom revived American production. A glut of crude emerged, first at Cushing and then by the cluster of refineries on the Gulf of Mexico. That pushed American crude prices below Brent. The spread peaked in 2011 at $28 a barrel. As the price of WTI began to say less and less about the state of the world market, traders spurned it in favour of Brent. Trading in contracts linked to Brent overtook those linked to WTI in early 2012.
The resumption of American exports has changed all that. The two benchmarks now trade at more or less the same price. WTI has duly regained its position as the most traded oil benchmark. This back-and-forth, however, may prove a distraction compared with another shift in the oil market: its centre of gravity is moving inexorably eastwards. OPEC, a cartel of oil exporters, expects demand in Asia to grow by 16m barrels a day by 2040. If that happens, Asia would end up consuming more than 46m barrels a day—four times as much as Europe. As Asia grows, it will become the dominant force in the world market.
A good benchmark has to reflect supply and demand for oil wherever it is used. WTI may continue to be influenced by bottlenecks in the American market. Brent reflects the market for oil in north-west Europe. That was once a positive, but as Europe’s share of global demand for oil declines, proximity to the continent is no longer the advantage it was.
That suggests that an Asian benchmark will rise to the fore. The Shanghai International Energy Exchange plans to launch its own yuan-denominated contract this year. The new benchmark will have trouble getting off the ground. For one thing, China’s capital controls make it difficult for foreigners to buy the yuan needed to trade the contracts. The wild swings in China’s equity markets set an unnerving example for investors. But time is on its side.