The oil pricing landscape is facing critical changes as regional activities surrounding established benchmarks are impacting markets on a global scale. Asia’s lower-than-anticipated appetite for crude oil, coupled with the misconception that all production will be dominated by the Middle East, suggests a potential re-emergence of West Texas Intermediate (WTI) as the international price reference.1 ZE consistently monitors industry trends like this, and in recognition of their importance, is participating in the upcoming Platts Global Crude Oil Summit, taking place from May 13-14, 2014, in London. Ian Gordon, ZE’s Director of Business Development (European Markets) and Richard Leonard, Product Manager, will be addressing the importance of an automated enterprise-wide curve management process for industry participants.

Organizations rely on timely and accurate pricing information about benchmarks to drive their hedging strategies, refining decisions, and other business-critical operations. If this data is ineffectively managed, organizations run the risk of missing profit opportunities and remaining stagnant in an ever-evolving market. ZE’s end-to-end enterprise data management solution, ZEMA, is a proven solution for the oil market that helps users manage and assess the impact that benchmarks have on the international oil pricing system.

What’s Driving WTI’s Comeback as the International Benchmark?

Currently, the spread between WTI and Brent futures has steadily narrowed to a level that suggests price parity for both locations. The recent plummet in Brent’s premium over WTI, diving under the $5 mark, has been attributed to an increase in transportation capacities from the Cushing oil hub to the Gulf Coast and a decrease in U.S. crude stocks.2

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Figure 1: The Brent-WTI prompt contract spread has been narrowing in recent months. | Data Source: NYMEX

As the supply glut in the U.S. seems to be dying down, opportunities to increase production revenues are on the rise for U.S. companies in comparison to international players.1 The new pipeline infrastructures, moving nearly 850 Mb/d, have increased the price correlation between WTI and the Gulf Coast’s benchmark oil, Light Louisiana Sweet (LLS).3

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Figure 2: Crude stocks at the LLS hub have been dramatically increasing in 2014 in comparison to the previous 4 years. | Data Source: EIA

The easing of demand from Europe and China, coupled with the U.S.’s new role as a major crude oil exporter, suggest that the Gulf Coast’s activities will be closely monitored by market participants. This is already apparent, as WTI’s high liquidity is expected to roll over to LLS, while stakeholders may decrease their basis risk when hedging.2

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Figure 3: The LLS-WTI prompt contract spread has been narrowing in recent months. | Data Source: NYMEX

These market trends imply that the distribution of U.S. crude to international consumers is easier than before; they also suggest that WTI’s increasing role in meeting global demand is driving its price uniformity with Brent.1 Price reassessments indicate new revenue prospects that can be best capitalized on with immediate access to timely, complete, and correct data.

Where Does the Data Management Issue Start?

As the borders of crude oil trading are slowly diminishing, it is crucial that market participants have immediate access to fundamentals, spot, and futures data if they are to enhance their core business strategies.  Data management becomes an issue when market players find themselves struggling to keep up with the many changes that are a result of WTI’s current performance.  Sometimes, business-critical decisions are adversely affected through manual data collection processes which occupy market participants’ time and prevent them from analyzing relevant oil market data. As such, it is of paramount importance that market participants prioritize the automation of benchmark data collection, as such data is often published in disparate formats and from a wide range of sources. In order to remain up to date on constantly fluctuating oil market trends and competitive, organizations can’t ignore the possible pitfalls associated with the mismanagement of essential information.

ZEMA’s Answer to Changing Benchmark Trends

By using ZEMA, a premier analytical tool, market players can assess the most current and historical trends associated with WTI, LLS, Brent, and other oil trading hubs. ZEMA users can rest assured that they are receiving a clean stream of data from major price reporting agencies, exchanges, and public sources; this data is also easily accessible and ready for end-of-day processes.

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Figure 4: 2014 has seen the Brent-WTI spread fall below the average spread values for the previous four years. | Data Source: NYMEX

ZEMA’s end-to-end data management solution provides market players with the competitive edge they need to instantly react to any shifts in pricing and other key industry-related metrics. Organizations can enhance their hedging strategies and production decisions by automating their data collection, analysis, and integration processes. To learn more about ZEMA, visit http://www.ze.com/the-zema-solutions/ today.

 

Bibliography

  1. Flynn, Phil. “WTI Poised to replace Brent as Benchmark?” Futures Magazine, April 10, 2014. Accessed April 20, 2014. http://www.futuresmag.com/2014/04/10/wti-oil-poised-to-replace-brent-as-benchmark.
  2. Zhou, Moming and Schlangenstein, Mary. “WTI Oil Poised for Benchmark Comeback as Glut Diminishes: Energy.” Washington Post Blog, April 9, 2014. Accessed April 19, 2014. http://washpost.bloomberg.com/Story?docId=1376-N3F59X6TTDS801-6J3PFDDM8P73L152FJ0QMKV0R0.
  3. Murtaugh, Dan. “Pipelines Help WTI Cushing Benchmark.” Bloomberg News, April 7, 2014. Accessed April 19, 2014. http://www.bloomberg.com/news/2014-04-08/pipelines-help-wti-cushing-benchmark-cme-director-says.html.