Oil is one of the most actively traded commodities in the world，it also knows as 'petroleum or crude oil' or more popularly known as 'Black Gold' in the modern world. Generally speaking, price fluctuation of crude oil closely related to political events and the economy.
Top five crude oil-producing countries,1980-2019
Photo: EIA
Two of the most commonly traded types of crude oil are West Texas Intermediate (WTI) and Brent Crude. There are five main differences between WTI and Brent:
1.EXTRACTION LOCATION
WTI is extracted from wells in the U.S. It is primarily extracted in Texas, Louisiana, and North Dakota and is then transported via pipeline to Cushing, Oklahoma for delivery. The fact that supplies are land-locked is one of the drawbacks to West Texas crude as it’s relatively expensive to ship to certain parts of the globe. The product itself is very light and very sweet, making it ideal for gasoline refining, in particular. WTI continues to be the main benchmark for oil consumed in the United States.
U.S crude oil production by state 2019
Photo: EIA
These days, “Brent” actually refers to oil from four different fields in the North Sea: Brent, Forties, Oseberg, and Ekofisk, which together are known as BFOE. Crude from this region is light and sweet, making them ideal for the refining of diesel fuel, gasoline, and other high-demand products. And because the supply is waterborne, it’s easy to transport to distant locations.
2. CONTENT AND COMPOSITION OF WTI AND BRENT
Brent and WTI have very different sulfur content and API gravity, which can directly affect the price of the oils.
While WTI has a sulfur content of 0.24%, Brent has a sulfur content of 0.37%. The lower the sulfur content of the oils the ‘sweeter’ the oil and the easier it is to refine. Both WTI and Brent are considered sweet crude.
The gravity of the oils is rated on a scale from 10 to 70, where the higher the number the less dense the oil. To put this in perspective, if the API is higher than 10 the oil will float on water, and if it is lower than 10 the oil will sink. Both Brent and Crude are relatively light oils.
On 1 January 2020, the International Maritime Organization (IMO) implemented a new regulation for a 0.50% global sulphur cap for marine fuels. Under the new global cap, ships will have to use marine fuels with a sulphur content of no more than 0.50%S against the current limit of 3.50%S to reduce the amount of sulphur oxide. The Emission Control Areas (ECAs) will remain at the 2015 standard of 0.1%S content.
3.DIFFERENCE BETWEEN WTI AND BRENT PRICES
In the past, WTI traded at a premium to Brent. However, due to the Shale Revolution in the early 2000s (in which WTI production increased) and more imports to the US from Canada, the price of WTI declined. It now usually trades at a discount to Brent.
Today WTI is the benchmark for oil prices in the US, while the rest of the world - and nearly two-thirds of all oil contracts traded - are on Brent. This makes Brent the global Benchmark.
The price difference between WTI and Brent is known as the WTI vs Brent Spread. The spread will change from time to time, as the supply and demand forces of each crude oil are elastic due to geopolitics, weather, and regulation.
Photo: EIA
4. DIFFERENCE BETWEEN TRADING LOCATION AND TIME
WTI futures contracts are traded on the New York Mercantile Exchange (NYMEX), which is owned by the Chicago Mercantile Group (CME). WTI futures contracts are deliverable in Cushing, Oklahoma. Cushing is a transshipment point with intersecting pipelines and storage facilities that has easy access to refiners and suppliers.
Brent futures contracts are traded on the Intercontinental Exchange (ICE) in London.
Photo: Internet
WTI futures trading hours:
Sunday-Friday 5:00 pm to 4:00 pm Chicago Time (CT) with a 60min break each day starting at 4:00 pm CT.
Brent futures trading hours:
Sunday-Friday from 7:00 pm to 5:00 pm CT the next day.
5. GEOPOLITICAL DIFFERENCE BETWEEN WTI AND BRENT
Geopolitical influences - such as volatile political systems of oil-producing countries, and OPEC’s rising and falling oil production levels - can have a big impact on oil prices. Traders should know how these vary for WTI and Brent.
Roughly two-thirds of all crude contracts around the world reference Brent Crude, making it the most widely used marker of all. Many oil-producing countries in the world rely on oil exports to balance their fiscal budgets, such as Saudi Arabia, Iran, and Iraq. The political systems of these oil-producing countries are usually relatively unstable, which has a great impact on Brent crude oil, so trading Investors in Brent crude should pay more attention to the development of the situation in the Middle East.
WTI oil traders, similarly, will be monitoring the supply and demand factors in the U.S. Disruptions to either Brent crude or WTI crude could cause the WTI-Brent to spread to change causing one of the markets to move more aggressively relative to the other.
Although there are many profit-making opportunities in the crude oil market, it is also full of greater investment risks. By investing you're taking a risk, and you have to be ready for both outcomes.
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