January 26, 2016
Changing contract expiration dates will affect crude oil futures comparisons
Source: U.S. Energy Information Administration, Intercontinental Exchange, CME Group
A change to the North Sea Brent crude oil futures contract will alter the way prices for Brent futures are compared to futures prices for West Texas Intermediate (WTI) crude oil. Beginning January 29, the Brent contract will expire, or rollover to the next month, approximately two to three weeks before expiration of the WTI contract for delivery in the same month. Prior to the change, the Brent contract rollover was only five to seven days ahead of the WTI rollover.
With earlier expiration dates for the Brent contract, the prompt month prices for Brent and WTI represent the same delivery period on fewer days each month. For example, on Monday, February 1, the prompt Brent contract will represent crude oil deliveries in April, while the prompt WTI contract will represent deliveries in March. The mismatch will continue for most of the month until the WTI contract for March delivery expires on February 22.
Crude oil futures contracts allow crude to be bought and sold for delivery at specific dates in the future, allowing market participants to lock in a price today for the future delivery of a barrel of oil. One of the roles of futures markets is price discovery, or price determination in a marketplace of buyers and sellers.
Two of the most important crude oil futures benchmarks are Brent, which trades on the Intercontinental Exchange (ICE) in London, and West Texas Intermediate (WTI), which trades on the New York Mercantile Exchange (Nymex) in New York. Both futures contracts have an underlying physical crude oil trade basis: cargoes of North Sea Brent, Forties, Oseberg, Ekofisk (BFOE) crude oils for the Brent contract and crude oil deliveries to the crude oil storage hub of Cushing, Oklahoma for WTI. The changing of the expiration date of the Brent futures contract is intended to better align the timing of when BFOE cargoes are bought, sold, and loaded onto tankers....MORE