Shale oil now has a new benchmark that can replace WTI - a Brent of its own
Monday, July 12, 2021

American shale oil has a new benchmark, and a driving force behind it is one of the Bakken’s own.

The new benchmark is called American GulfCoast Select (AGS) and Continental’s Harold Hamm is among its architects.

The new benchmark was designed to rival the landlocked U.S. West Texas Intermediate futures contract, which is based on delivery to Cushing, Oklahoma, and which has typically been used to reflect the value of a barrel of Bakken crude oil.

The delivery location for WTI, however, is 500 miles from water, and that has led to market distortions in the past. Most notably, it led to negative $38-dollar futures contracts last year during the pandemic.

Brent, meanwhile, is priced on an island in the North Sea, with immediate access to tanker storage. That insulates Brent from market distortion like that caused by the supply glut caused by the Saudi-Russian price war during the pandemic.

The new benchmark is based on Gulf Coast delivery instead of a land-locked location, essentially giving shale a Brent of its own. That will better reflect shale oil’s value in the world market, and should prevent market distortions due to lack of storage infrastructure.

Hamm, in a recent editorial circulated by the Montana Petroleum Association, said the negative future contracts for WTI were a wake-up that the situation at Cushing, Oklahoma, through which a lot of Bakken crude oil still travels, was no longer tenable.

“The benchmark on which we had relied for decades was on longer reflective of the migration of U.S. crude oil production to the global market,” Hamm said. “I knew we needed to shift toward a benchmark that could more accurately and reliably price crude oil in America.”

The Gulf Coast will be a natural for that, Hamm added, with growing infrastructure and a naturally occurring migration of resources that supports not just America, but the world.

“We think a futures contract in the most interconnected market center in the country, with a widely accepted quality spec, which settles with guaranteed delivery of crude oil is an important new alternative for the industry,” Hamm said. “The task force has worked tirelessly to create a marker with transparency and liquidity that is waterborne for this modern era.”

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