What are Brent Oil Futures?
Brent Oil futures are financial products used by producers and marketers to manage the risk of price fluctuations in the Brent oil market.
A Brent future is a standardized contract that is traded on an exchange between two parties. The buyer of the contract agrees to accept delivery of a specified quantity of brent oil from a seller at a predetermined price on a future date.
What is Brent Oil?
Brent Oil is a sweet, light crude oil (LCO) that is used for benchmarking the prices of nearly 60% of the crude oils traded worldwide.
Petroleum suppliers from Europe, Africa and the Middle East selling oil to the West will often price their oil as per the Brent Crude’s value on the ICE exchange.
The physical commodity known as the Brent Blend is made up of four main grades of crude oil: Brent Blend, Forties Blend, Oseberg and Esofisk crudes (collectively known as the BFOE). The Brent blend makes up nearly half of the world’s internationally traded supply of oil.
The Brent complex has about 0.37% of sulfur content by weight, hence it is more sour than the West Texas Intermediate (WTI) crude, which has sulfur content of 0.24%. Brent’s API gravity is 39, which also makes it heavier than WTI crude. Since it is a crude oil, it is best for producing petroleum and middle distillates.
Nearly all crude oil that flows into North America from Europe, Middle East and Africa (EMEA) is priced relative to the Brent Oil Complex. In fact, in recent years, Brent has emerged as the world’s most commonly referenced benchmark for crude oils.
In Malaysia, Indonesia, Vietnam and Australia, Brent is often used as a preferred price marker and as a result, new Asian product spreads to Brent have emerged.
One of them, the Brent/Dubai spread, is growing fast in trading volume.
One of the most well known and traded spreads is the Brent / WTI spread, which is the difference in price of WTI minus Brent. While Brent has historically traded lower to WTI, its recent performance has been remarkable. Brent has outperformed WTI since 2011 and is currently trading at a premium.
Brief History of Brent
North Sea Brent was first discovered in early 1960s. Originally, Brent Crude oil was extracted from a single oilfield, called the Brent oilfield. Shell UK used to name all of its oil fields after birds, which is why the Brent oilfields came to be named after the Brent Goose. However, “Brent” also served as an acronym for the layers of the oil field: Broom (oseBerg), Rannoch, Etive, Ness and Tarbet.
Crude Oil production in the U.K. and Norway began to grow and became increasingly commercial in the late 1970s. Oil producers and refiners needed a tool to protect against any future price movements, and the first Brent futures were introduced in 1988 to fulfill his need. The first futures contracts only covered the oil from Brent oilfield, but more grades of oil were added as production and liquidity began to grow in the physical markets. Today, Brent futures cover BFOE crudes from 15 different oilfields.
The prices of Brent Crude have been historically steady from the late 1980s to the early 2000s, but have followed a general upwards trend since 2004. The prices reached a peak in the summer of 2008, but dropped again over the next six months. Since 2011’s unrest in the Middle East, prices have started climbing again.
Where is Brent produced?
Brent prices are based on crude oil production from four different oilfields off of the coast of the UK and Norway. Average North Sea crude oil output is around two million barrels per day (bpd) and the BFOE is around 1 million bpd.
Brent Crude, also known as Brent petroleum is primarily extracted from the ocean and ground in the North Sea, and usually refined in northwest Europe. Some of it is also refined in the East or Gulf of the U.S. and in the Mediterranean region.
Primarily, Brent Oil is used to produce petroleum and middle distillates like kerosene and diesel.
Generally, Crude oil that comes right out of the ground or the ocean has limited uses. Brent is a crude, sour oil straight out of the ground, but once it is processed into gasoline, it is used widely in a range of products that are essential to modern industry and day to day living.
Dated Brent has been traditionally used as the price reference for crude oil in the Europe, Middle East and Africa (EMEA region).
In recent years, Brent crude has increasingly flowed from Europe into Asia, powering the continent’s rapid growth. Brent-Dubai witnesses heated trading and is one of the most actively traded spreads in Asia today.
U.S. based end-users and refinery owners also use Brent for hedging since it is a globally relevant benchmark, and is internationally arbitraged to U.S. refined oil product exports or oil imports.
Who Invests in and Trades Brent Oil Futures?
Brent Oil traders can be broken down into two main categories: hedgers and speculators.
The largest players and participants in the Brent futures market are commercial hedgers such as producers, users, processors and merchants. Brent is a significant tool for hedging in the physical commodity markets.
Producers and marketers of Brent can minimize the risk of price fluctuations in the Brent oil market by using a short hedge, so that they get a specific amount as per the contract, for their oil supply—even if prices fall in the future. Consumers of Brent (businesses, like gasoline refineries, that need Brent) can use a long hedge to fix a purchase price for a certain quantity of Brent as per their need.
Brent futures are also traded by speculators. Speculators have no vested interest in the underlying asset, that is, they will neither deliver Brent nor take delivery for Brent. They trade in and out of Brent futures only based on speculations about the price fluctuations of Brent over the trading period. Brent futures are a popular choice for many investors and traders looking to get an exposure to the oil market without directly investing in it.
Trading Brent in the US Brent crude futures trade heavily on the New York Mercantile Exchange (NYMEX), using the symbol “BZ.” These futures trade electronically as well as with an open outcry method. Some of the more popular Brent futures are the Brent Crude Oil Penultimate Financial Futures and the Brent Crude Oil Last Day Financial Futures. A single contract is for 1,000 barrels and is quoted in U.S. dollars and cents per barrel. Contracts are listed for the current year plus five years, and are financially settled. The minimum price fluctuation is $0.01.
International Brent Oil Trading
Brent Crude oil traded on the International Petroleum Exchange in London until 2005 on an open cry system. Since 2005, Brent Crude futures have traded electronically on the Intercontinental Exchange (ICE) in Europe under the symbol “B.”
The ICE Brent futures are based on the underlying physical BFOE market and have the highest daily output of any of the world’s oil benchmarks.
A typical contract is for 1000 barrels and is quoted in U.S. dollars. The contract is a deliverable contract, with a cash option. The NYMEX and ICE futures markets are linked and traders can hedge a position in one of the markets by using the other.
How to Trade Brent Futures: Costs and Different Brokers
You can trade futures by opening a trading account with a trusted broker who handles futures trading. Starsupply Commodity Brokers, CME Globex, CME Clear Port and Etrade are some well known online platforms for trading futures.
Most brokerages will charge the National Futures Association fees, which is roughly around $0.02 per side, along with a commission (which can range from $0.025 to $3 and more, per contract per side). You will also have to pay an exchange fee, which will vary depending on the exchange and the specific contract you are trading. Be sure to look at the fine print and add up all the fees into your cost.
Brent Oil futures are not without their risks. Like any other crude oil prices, Brent oil prices also fluctuate rapidly. Brent oil futures are directly controlled by changes in the underlying physical market. If there is any disruption in the physical market—due to geopolitical events, logistical issues and changing global demand—Brent prices will fluctuate.
Brent oil is also affected by seasons, with output falling during the summer, from July to September. The Brent is extremely sensitive to events in the global economy, so market predictions need to keep an eye on political and economic events in key regions of the world. Any disruption or unrest in the Middle East can cause sudden spikes in Brent prices. Brent is also heavily dependent on the demand from the U.S. and Asia. Any slowdown in these regions will impact volatility. As with most other fuels, Brent too is threatened by the emergence of newer, greener substitutes.
However, despite these risks, Brent remains the most liquid market of any of the transparently traded benchmarks in the world. Brent has greater physical production than WTI and its high liquidity has spurred growth in Brent trading worldwide.