Exclusive: Brent Oil Traders Utilize Lesser-Known Rule to Reroute U.S. Cargoes, Reports Reuters

By Florence Tan, Alex Lawler, and Robert Harvey

LONDON – Major energy traders dealing in oil cargoes associated with the Brent benchmark have employed a little-known clause to redirect U.S. shipments intended for Europe. This practice raises questions about the effectiveness of recent reforms aimed at stabilizing the crude price marker.

Brent serves as a crucial benchmark in global commodity markets, pricing over 60% of internationally traded crude and influencing oil futures. As a result, fluctuations in its value have direct repercussions on fuel costs for both consumers and businesses.

Recent changes to the benchmark were intended to enhance transparency and reduce practices that could distort Brent prices. However, the redirection of shipments has ignited concerns regarding the accuracy of the benchmark in reflecting true supply and demand.

In the previous year, a subsidiary of S&P Global allowed U.S. WTI Midland crude shipped to Europe to be factored into its Brent price assessment, known as dated Brent. This move aimed to improve liquidity due to declining supplies from established North Sea fields and other regions.

However, several trading sources reported that some WTI cargoes designated for Europe under this system missed their destination. Notably, trading firms have leveraged a clause in the assessment methodology, referred to as ‘bookout’, which permits them to switch cargo destinations from Europe to Asia or retain them within the U.S.

While this practice is allowed under the methodology established by S&P Global, traders and analysts warn that it could distort prices, including that of dated Brent, by falsely indicating stronger demand in Europe than actually exists.

Despite the concerns, a definitive link between this trading activity and price movements has not been established.

"The crux of the issue is that traders monitor delivered trades and account for barrels arriving in Europe," explained Adi Imsirovic, a trader and consultant with expertise in Brent. "When bookings are subsequently adjusted, those barrels that previously set the dated price effectively vanish."

An official from S&P Global stated that no complaints have been made regarding this practice, acknowledging that a minority of cargoes have altered their sales basis from delivered to free on board (FOB), allowing for broader destination flexibility. "Such contract modifications are commonplace in many markets," the official noted.

Trading firms like Trafigura, Gunvor, and Vitol have been identified as utilizing the bookout mechanism to modify the destinations of WTI cargoes sold into dated Brent.

A spokesman for Trafigura highlighted that any changes made in response to buyer requests for alternative discharge options are aligned with industry norms. Meanwhile, Gunvor and Vitol chose not to comment.

S&P Global assesses dated Brent’s pricing based on the least expensive of five North Sea crudes and WTI Midland on the assessment day.

Imsirovic argued that changes in physical Brent trade bookings should be communicated to S&P Global, as such adjustments could necessitate corrections in price assessments.

Despite the concerns, S&P Global has no intentions of making the conversion process from delivered to FOB transparent or retroactively altering assessments when cargo destinations are adjusted.

U.S. regulators, including the Commodity Futures Trading Commission (CFTC) and the European Securities and Markets Authority (ESMA), have refrained from commenting, referring inquiries to the Dutch Authority for the Financial Markets (AFM). The AFM responded that it does not oversee S&P Global’s crude oil benchmark as it is not regulated under EU Benchmark Regulation.

In a specific instance, Trafigura originally sold three WTI cargoes for delivery to Rotterdam on October 2, 2023, but later negotiated rerouting to China. On that day, market demand pushed the differentials for Forties, Brent, and WTI crude higher, signaling robust activity despite changes in destination.

Further, other trading firms have reportedly shifted cargoes originally intended for Europe to FOB designations, although exact figures remain unquantified.

Former S&P Global executive Jorge Montepeque, who was instrumental in the development of dated Brent, suggested that destination changes should indeed be disclosed.

Imsirovic emphasized that speculative bidding for WTI cargoes can misrepresent actual demand in Europe, while S&P Global maintained that such market dynamics are reflective of genuine pricing pressures rather than a distortion of demand perception.