WTI v. Brent Oil: What Does This Mean?
Although there are dozens (actually, over 150) different grades of crude oil (view current prices), the only two that typically get reported in the news are Brent and West Texas Intermediate (WTI). These two crudes have carved out their position as the benchmarks for oil throughout the world.
In this edition of Energy Insights, we dive into the details of the globe’s most referenced crude oils.
WTI Oil: West Texas Intermediate
The WTI benchmark – which stands for West Texas Intermediate – is the benchmark for all crude oil that originates in the United States and gets sent along to the American hub for oil in Cushing, Oklahoma. It coins the name ‘Texas light sweet’ as well, since it’s a light crude oil (meaning its substance has relatively low density) and is thought of as ‘sweet’ due to its low sulfur content. These characteristics make it ideal for refinement and movement up the supply chain. Crude oil is best found in landlocked areas, so it’s unsurprising that a large majority of oil in the U.S. stems from the Permian Basin. Texas, Louisiana, and North Dakota are states that produce the most crude oil by volume. However, because of its typically remote locale, transportation costs for this type of oil tends to be high.
Prior to the millennia, oil was excavated more commonly in other areas of the world. However, technological advancements in the 2000s allowed the extraction of oil from shale rock. This discovery – now called the shale revolution – caused a milestone shift in worldwide production. In fact, those advancements led the way for America to be the #1 crude oil producer in the world in 2019 – surpassing production of Russia and Saudi Arabia.
Brent is the benchmark for European and African nations and is used as the pricing tool for roughly 2/3 of all the world’s crude oil pricing. Other names that this crude oil goes by includes ‘Brent oil,’ ‘Brent crude,’ and ‘London Brent.’ It is extracted from the North Sea – a wide expanse of water between Norway and the Shetland Islands. Given that the Brent benchmark is a result of 15 different ‘oil fields’ in the sea, it is comparatively less light and less sweet than WTI crude. ‘Brent’ is an acronym for the formation of layers in these oil fields: Broom, Rannoch, Etive, Ness, and Tarbert.
Brent’s origins help lower overall transportation expenses – it is refined closer to its source, which reduces middleman utilization that is currently necessary for WTI. The Brent index is not representative of real-time trades – rather, Brent futures are utilized on the Intercontinental Exchange (ICE). Brent futures represent the 25-day average price of trading for the Brent blend.
Why the Price Disparity Between WTI & Brent?
To understand the difference in pricing between the two benchmarks, one must first understand what causes the fluctuations in pricing for either.
When Brent prices take a dip, that means that Brent crude imports into North America have been decreased. This happens when there is increase in U.S. light sweet crude production (aka, WTI) – more domestic production means there is reduced need for international sourcing.
When WTI sees a raise in pricing, that is indicative of infrastructure limitations. Texas light sweet crude follows this process: crude is extracted in production fields; it is then brought to storage locations; then, it’s brought to delivery points (where oil contracts are made); and, finally, the crude oil is brought to refining centers. The capacity to alter oil pricing can occur anywhere along this chain of events.
Advancements in drilling and fracking that continue through today have been another factor that makes WTI prices lower than Brent. Those improvements have been able to drastically reduce the costs associated with drilling.
The most considerable impact on the pricing of crude comes from geopolitical disorder and weather fluctuations. In times of political uncertainty, there tends to be price surges in Brent crude, while WTI (because of its landlocked nature) tends to be less affected. As in the case of a price war – as we are witnessing at the time this article is being written – all crude oil prices tumble downwards.
Crude oil – appropriately nicknamed ‘black gold’ – is one of the most actively traded commodities in the world and is globally considered as the essential source of energy. Either extreme – whether abundance or scarcity – have substantial impacts in the world on a macro and micro scale. In their respective markets, BRENT and WTI dictate oil pricing.
When U.S. Energy makes any sort of report regarding oil pricing, we are utilizing WTI benchmark.
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