Brent Crude – Definition

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Brent Crude Definition

Brent Crude refers to sweet light crude oil whose value is used as a benchmark for the price of oil worldwide. This oil has relatively low density and has low sulphur content thus the description ‘sweet light’. It is extracted from the North Sea with classifications such as Forties Blend, Brent Blend, BFOE Quotation and Oseberg.

A Little More on What is Brent Crude

There are other benchmarks, also called classifications or references, including Dubai Crude, OPEC reference basket, Oman Crude, West Texas Intermediate, Urals Oils and Shanghai Crude. Brent Crude is the global benchmark responsible for pricing two-thirds of the world’s crude oil supplies.

Brent Crude is so named as it was originally produced Brent oilfield in the UK. The name is also an acronym showing the formation layers of the Brent oilfieds which are Broom, Rannoch, Etive, Ness, Tarbert. Brent Crude is used a benchmark to price oil that flows West from Africa, Europe and Middle East.

Characteristics

Brent Crude is light with 0.37 percent sulphur content and an API gravity of 38.06 which is equal to a specific gravity of 0.835. Though light and sweet, it is not as light or as sweet as the West Texas Intermediate.

Brent crude is purified in Northwest Europe and used to produce middle distillates and petrol.

Futures market trading

B is the symbol used for Brent Crude in the ICE Futures Europe. Currently, B is traded on ICE with one contract equated to 1000 barrels. Contracts are in US dollars and each ticket gained or lost is $10.

Brent Index

Brent Index refers to cash settlement price ICE Brent future based on ICE’s index at the time of expiry. This index shows the average trading price in the 25-day Oseberg, Forties, Ekofisk (BFOE) and Brent Blend market as reported by industry media. This index takes into consideration published cargo size, trades and assessments.

This media is calculated from:

  •         Weighted average of cargo trades from the first month in 25-day BFOE market
  •         Weighted average of cargo trdes from the second month in 25-day BFOE market
  •         Straight average of assessments published in the media

References for Brent Crude

Academic Research on Brent Crude

  • The effect of futures trading on spot price volatility: evidence for Brent crude oil using GARCH, Antoniou, A., & Foster, A. J. (1992). Journal of Business Finance & Accounting, 19(4), 473-484. This paper studies how the price of futures affects the spot price volatility. It finds that Brent crude oil spot prices increase with increase in future prices. The two prices are co-integrated thereby affecting the rise or drop of each other.
  • Co-movements of Alaska North Slope and UK Brent crude oil prices, Ewing, B. T., & Harter, C. L. (2000). Applied Economics Letters, 7(8), 553-558. This study looks at the univariate and multivariate links between UK and Alaska North Slope Brent oil prices. The study reveals that the two oil markets trend the same and are unified. It shows that the competitive nature of these markets brings price convergence in the market.
  • Forecasting crude oil price with an EMD-based neural network ensemble learning paradigm, Yu, L., Wang, S., & Lai, K. K. (2008). Energy Economics, 30(5), 2623-2635. This study looks at the forecasting of the world crude oil spot price using empirical mode decomposition based learning paradigm. To do this, original spot prices series were decomposed into small intrinsic mode functions (IMFs) and a three-layer network used to model each of the IMFs. This allowed the researchers to accurately predict the tendencies of the IMFs. The results from the prediction were used to formulate and ensemble output based on the original crude oil price. To verify the results, West Texas Intermediate and Brent crude oil spot prices were used.
  • Are the crude oil markets becoming weakly efficient over time? A test for time-varying long-range dependence in prices and volatility, Tabak, B. M., & Cajueiro, D. O. (2007). Energy Economics, 29(1), 28-36. This paper explores how efficient oil markets are estimating the fractal structure over time. Using Rescaled Range Hurst analysis, the study finds that the oil markets have become more efficient with time.
  • Effects of NYMEX trading on IPE Brent crude futures markets: a duration analysis, Lin, S. X., & Tamvakis, M. N. (2004). Energy Policy, 32(1), 77-82. This paper shows how the changes in crude oil prices have revived the interest on the New York Mercantile Exchange (NYMEX) and London’s International Petroleum Exchange (IPE). The paper studies the interaction between these two markets when both are open and when only one is open. The paper looks more into the effects of NYMEX analyzing Brent futures on IPE. This shows that NYMEX has dominated the trading of IPE. In conclusion, NYMEX is seen as the leading crude oil price setter with effects on IPE trading.
  • The link between the Brent crude oil price and the US dollar exchange rate, Novotný, F. (2012). Prague Economic Papers, 2(2012), 220-232. This paper looks at the growing inverse relationship between the dollar and the crude oil prices in the last decade. This has been attributed to the role of commodities as investment in times of liquidity and low interest rates. The reports show that the price of Brent crude rises by more than 2 percent when the dollar weakens by 1 percent.
  • Testing for adjustment costs and regime shifts in BRENT crude futures market, Mamatzakis, E., & Remoundos, P. (2011). Economic Modelling, 28(3), 1000-1008. This paper explores the co-integration of Brent crude future and spot oil prices. The method applied in this study, TVECM, allows the researchers to evaluate the degree and effects of transaction costs from market imperfections. The analysis shows that the crude oil market follows a graduation path to integration. The futures and crude spot prices are co-integrated.
  • The efficiency of the crude oil markets: Evidence from variance ratio tests, Charles, A., & Darné, O. (2009). Energy Policy, 37(11), 4267-4272. This study examines how efficient the crude oil markets are by studying the UK Brent and the US West Texas Intermediate for the period between 1982 and 2008. The study uses variance ratio tests and concludes that the Brent crude oil market shows weak-form efficiency and the West Texas Intermediate showing inefficiency.
  • Multifractal analysis on international crude oil markets based on the multifractal detrended fluctuation analysis, Gu, R., Chen, H., & Wang, Y. (2010). Physica A: Statistical Mechanics and its Applications, 389(14), 2805-2815. This paper studies the multifactal nature of both WTI and Brent crude. It concludes that, the two Gulf wars affected the international oil markets with Brent ending more influenced.
  • Unobservable information and behavioural patterns in futures markets: The case for Brent Crude Oil, Gold and Robusta Coffee contracts, Spyrou, S. (2006).  Derivatives Use, Trading & Regulation, 12(1-2), 48-59. This study shows how investors do not efficiently react to information offered in price shocks. It also shows how lack of strategy in Brent oil futures contract can generate arbitrage profits indicating how pricing inefficiencies can be exploited in practice.

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