Why the North Sea Oil Pipe Is Critical for Global Crude?

BLOOMBERG.COM- The halt of the Forties Pipeline System after the discovery of a hairline crack matters to global crude markets more than most such incidents. The North Sea oil price, its relative price and a measure of the strength of the Brent crude market all surged after the halt. Oil refiners’ margins for processing North Sea oil also slumped.

Its importance goes far beyond the fact that it carries about 50 percent of U.K. oil production. Forties is one of the North Sea grades that determine the value of the Brent futures contract. Brent, in turn, affects the pricing of crude oil around the world. A spike in Brent prices has a knock-on effect on crude exports from the Middle East and West Africa. Official selling prices for Middle Eastern crude from countries like Saudi Arabia, Iraq, Kuwait and Iran for buyers in Europe are often expressed as differentials to Brent. West African crude exports are also priced relative to Brent.

A spike in Brent prices relative to other benchmark grades, such as WTI or Dubai, could make West African and North Sea grades less competitive in Asia than rival Middle Eastern flows, which are priced relative to Oman and Dubai crudes for Asian sales. It could also make crudes from North and South America, which are priced against WTI, more competitive in Europe and Asia against those grades priced relative to Brent. The loss of around 400,000 barrels a day of Forties crude -- the amount that gets moved in practice -- will boost the price of other similar grades, as buyers of physical cargoes look for alternatives to meet their needs. Other North Sea grades, as well as West African and possibly Caspian Sea crudes, could see higher prices as a result.

Courtesy: www.bloomberg.com