Redefining the Convenience Yield in the North Sea Crude Oil Market
Despite falling production volumes and recent modifications to the way it is traded and prices reported, Brent crude oil produced in the North Sea remains the dominant marker grade for most of the crude oil produced and consumed outside of the Americas. This paper derives from a fundamental observation made by Paul Horsnell and Robert Mabro1 which is that 80% of the physical, so called, dated Brent cargoes traded are still to be loaded at the time of the transaction. From its inception, the logistics of the Brent market meant that there was an average gap of roughly thirteen days between a dated Brent contract agreement being made and the first day of the three-day date range when the parcel of oil is to be loaded on to the vessel. Recent contract reforms now mean the gap has been extended to an average gap of 17 days. This is not the case, for example, in the market for West Texas Intermediate (WTI) which is the dominant crude oil marker grade for the Americas. Spot WTI is traded for immediate delivery. Given the
importance of dated Brent crude as a marker, this observation has an important impact on the way we represent the term structure of spot and forward prices of Brent crude. Horsnell and Mabro did not develop their observation further but it has implications for the classical formulation of convenience yield and the theory of storage in relation to the North Sea oil market.