Brent or WTI– which global benchmark?

It has been coming for years, but Brent looks set finally to overtake U.S. light crude as the preeminent oil benchmark next year as one of the top financial market indexes switches weightings.
Brent is becoming the hedge of choice for big investors, even for U.S. companies. The volume of Brent futures and options has soared, boosting liquidity at the expense of the U.S. crude, also known as West Texas Intermediate, or WTI. The widely followed S&P GSCI index marks this on January 1, raising its weighting for Brent and cutting WTI, following a migration by major oil producers and consumers.
Saudi Arabia and other producers have already moved away from the landlocked U.S. grade while oil refiners, end-users and hedge funds have gravitated towards the North Sea benchmark that they think tracks global risk more accurately.
Average volume this year for Brent futures on the InterContinental Exchange (ICE) has overtaken WTI traded on the New York Mercantile Exchange (NYMEX) by more than 30,000 lots per day, exchange data show, with Brent at over 600,000 and WTI trailing around 570,000.
Combined volumes of the two exchanges still show WTI futures ahead in terms of volume and open interest, but Brent is closing and looks set to eclipse its U.S. rival early in the New Year.
Although the Brent options market is still only around a quarter the size of the WTI options market, ICE and NYMEX data show, Brent options volume has increased by more than 300% so far this year. A string of companies in the Americas have adopted Brent. U.S. carriers Southwest Airlines and Delta have switched to Brent to hedge their exposure to jet fuel. Colombia’s Ecopetrol said last month it was moving the pricing basis for crudes to the North Sea grade and Trinidad state company Petrotrin and partners Bayfield have also said they will sell oil linked to Brent, dropping WTI.
The main criticism of WTI has been that it no longer tracks the international spot market as efficiently as Brent. Growing U.S. and Canadian oil production has driven down the price of crude oil in the Midwest of the United States, where WTI is priced, and an inadequate pipeline network has made this problem worse, helping depress WTI prices versus Brent. ICE Brent was at a $26 premium last week.
The landlocked nature of WTI led the world’s biggest oil exporter, Saudi Arabia, to drop the U.S. crude as the basis for U.S. sales in favour of a basket of Gulf of Mexico crudes.
The WTI futures contract is also at a disadvantage because of its price structure. With the WTI front-month contract at an almost permanent discount to forward barrels, investors who track the contract are penalized by a negative roll-yield. Each time the first WTI futures month expires, investors have to replace it with a more expensive later month. But Brent has a positive roll yield, with the front month at a premium to later months, giving an easy profit for investors.

EMP Weekly Market Review, 22.11.2012