In this article, we discussed the most popular oil bench marks in the world which is the brent crude and the west Texas intermediate.
Brent crude and West Texas Intermediate are the two major benchmarks for crude oil pricing. The main difference between them lies in their extraction locations, density, and sulfur content.
Oil benchmarks describe where the commodity originates, which determines its use and allows investors to track the price of a specific oil type.
BRENT CRUDE
Brent Crude is the benchmark used for the light oil market in Europe, Africa, and the Middle East, originating from oil fields in the North Sea between the Shetland Islands and Norway.
Brent crude oil is a blended oil (a mix of Brent, forties, Oseberg and Ekofisk) drilled from below the North Sea. It is popularly refined into diesel fuel and gasoline. In trading, Brent is one of the benchmarks for oil in the wider market, such as the Middle East, Europe and Africa.
WTI
West Texas Intermediate (WTI) is the benchmark for the U.S. light oil market and is sourced from U.S. oil fields.
WTI (West Texas Intermediate) oil – US crude with IG – is a blend of several oils drilled and processed in the United States. It is commonly used for gasoline refining. In the trading world, WTI is primarily a benchmark for the US oil market.
Brent Crude and WTI are light and sweet, making them ideal for refining into gasoline.
Brent Crude is more universal, and most oil is priced using Brent Crude as the benchmark, akin to two-thirds of all oil pricing. Brent Crude is produced near the sea, so transportation costs are significantly lower.
In contrast, West Texas Intermediate is produced in landlocked areas, making transportation costs more onerous.
WTI VS. BRENT CRUDE
There has been a trend, due to advancements in oil drilling and fracking, of West Texas Intermediate becoming cheaper than Brent Crude oil. Prior to this, Brent tended to be cheaper than West Texas Crude. This has been dubbed the American shale revolution, and the increased production led oil prices to fall from above $100 to below $50 from 2014 to 2015.
The price of oil is a major factor in the overall health of the energy sector and is one of the most heavily traded commodities as it is influenced by almost every global, macro event.
Another factor that can lead to significant differences between the two is geopolitical trouble. During times of crisis, the spread blows out as political uncertainty leads to surges in Brent Crude prices. West Texas Intermediate is less affected because it is based in landlocked areas in the United States.
Brent crude vs WTI: five differences
- Extraction location
- Composition
- Geopolitical influences
- Trading exchange
- Pricing
Extraction location:
Because Brent is extracted at sea and not on land, there are certain advantages. Large volumes of oil can quickly and safely be transported in underwater pipelines. In the US, however, the production advantage lies in new extraction technologies, such as well stimulation techniques and horizontal drilling.
Composition:
When oil has a low Sulphur content, it is known as ‘sweet’ oil. American Petroleum Institute (API) gravity refers to the density of the oil – measured on a scale from ten to 70. The higher the number, the less dense the oil. Light sweet oils flow more freely at room temperature, making them easier and cheaper to refine.
Geopolitical influences
The political state of oil producing countries has a significant impact on the commodity’s production and price. When it comes to this crude oils, traders should keep an eye on the political climate in the Organization of the Petroleum Exporting Countries (OPEC) regions and the US. A huge political shift in North America, for example, would affect WTI more than Brent crude, and the spread between WTI and Brent would likely widen.
Trading exchange
Oil is traded on exchanges, just like shares, but they are traded in the form of oil benchmarks. This enables traders to quickly identify the quality and drilling location of the oil they are buying and selling.
Pricing
Though there are some correlations in composition and usage, all crude oils are not priced equally. The difference between the spot price of Brent crude and WTI is called the Brent/WTI spread. Factors related to supply and demand, including production interruptions and geopolitical influences, can widen the spread.