WTI and Brent crude, both light and sweet, are considered global crude oil benchmarks
WTI is extracted from the United States, primarily in Texas, Louisiana, and North Dakota; Brent is extracted from the North Sea
Understand the unique characteristics of each benchmark and how they respond to different geopolitical, local, and economic forces
So you’ve given some thought to trying your hand at commodities investing, and you think the Energy sector might match your objectives. In the news, you hear about oil just about every day, and you’ve identified crude oil as your market of choice. But there’s more than one type of crude oil traded on U.S. exchanges—West Texas Intermediate (WTI) and North Sea Brent (Brent) crude.
Both have comparatively different trading volumes depending on the contract months. And even though Brent and WTI prices are correlated, meaning they tend to move together, there are times when Brent is more expensive than WTI and vice versa.
Now you must stop and ask yourself:
- What are the similarities and differences between the two commodities? Are their prices affected by the same global economic forces?What role might local economics play in differentiating WTI versus Brent crude prices?
Light and Sweet vs. Heavy and Sour
“WTI and Brent crude are both referred to as light and sweet crude oils,” said Stephanie Lewicky, senior manager, Futures & Forex at TD Ameritrade. But what do these terms mean, exactly?
“To begin with, there are many different types of crude oil and crude oil blends in the world, and they’re typically classified according to their capacity to be refined into gasoline,” added Lewicky. “Crude oil that is lighter in density is easier to refine into gasoline. Conversely, oils with heavier densities are more difficult to refine.”
The standard measurement to classify oil density is API gravity (developed by the American Petroleum Institute). With numbers falling between 10 and 70, the lighter the oil, the higher the API gravity number. For example, oils in the high API gravity range—light oils—will often float on water; correspondingly, these oils are easier to refine. Heavy oils in the lower range of API gravity scores will sink in water.
What about the term sweet? “This has everything to do with crude oil’s sulfur content, and the cutoff is 0.5%. Sulfur content higher than 0.5% is considered sour; lower than 0.5% is considered sweet. The sweeter the oil, the easier it is to refine into gasoline and other petroleum-based products,” Lewicky commented.
So, crude oil that is both light and sweet is easier to refine. And these two qualities make up the benchmark for premium oils. “Brent crude is often considered the global benchmark for oil because up to two-thirds of the world’s oil is priced off of Brent crude futures. Others talk about WTI, also known as light sweet crude, as it’s considered the U.S. benchmark for pricing oil,” Lewicky explained.
Differences in WTI vs. Brent Crude and Why They Matter
Consider the differences between the two types of crude oil traded on U.S. exchanges.
- WTI is extracted from the United States; its fields are located in Texas, North Dakota, and Louisiana.Brent is extracted from the North Sea near Europe; its oil fields include Brent, Ekofisk, Forties, and Oseberg.
- WTI has an API gravity of 39.6°, making it very “light.”Brent has an API gravity of 38°—still quite light, but it’s not as light as WTI.
- WTI has a sulfur content of 0.24%, making it very “sweet.”Brent has a sulfur content of 0.40%, well under the 0.50% benchmark, but it’s not as sweet as WTI.
- WTI is landlocked, making it more difficult to transport.Brent is extracted at sea, making it easier to transport.
Futures on these major crude oil benchmarks are listed on U.S. and European exchanges.
- The most widely traded WTI crude oil contracts (/CL) are traded on the NYMEX, one of four exchanges owned by CME Group.Brent crude’s primary exchange is the Intercontinental Exchange (ICE), but CME Group also lists a Brent contract (symbol /BZ on the thinkorswim® platform; see figure 1), although volume in the CME contract is much lower.
FIGURE 1: BRENT OVER WTI. Over the last few years, Brent crude (purple line) has, for the most part, traded at a premium to WTI (candlestick), although there have been periods of convergence. Data source: CME Group. Chart source: The thinkorswim platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
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One short answer is that quality isn’t the only consideration. Location, delivery logistics, and global supply and demand also play a part. “The WTI delivery point is Cushing, Oklahoma, which is a landlocked area, centrally located around the major oil fields, but far from where most oil and refined products—gasoline and petrochemicals, for example—are ultimately destined,” Lewicky mentioned.
Geopolitics and Local Economic Forces Influence the Brent-WTI Spread
In 2011, amid tensions in the Middle East, fears of a Suez Canal closure caused Brent prices to trade at a premium to WTI. The spread widened further as Iran threatened to close the Strait of Hormuz, a shipping route through which 20% of the world’s oil was transported. By the end of 2011, Brent was trading $25 above WTI.
In 2015, the Brent-to-WTI spread dropped because of events in the United States and the Middle East. Iran, whose oil is benchmarked to Brent crude, agreed to increase flows into the market. This created more supply, which caused Brent prices to move lower. At the same time, U.S. rig counts declined while its WTI export activity increased. The decrease in U.S. oil production and supply, thanks to its increased exports, pushed WTI prices higher relative to Brent, but the conversion was short-lived. Brent has traded at a premium since early 2016.
By the middle of 2018, the Brent-to-WTI spread had widened to more than $6 per barrel. Many analysts attributed this to distribution bottlenecks in the United States and competition from Canadian oil.
In early 2020, the killing of a top Iranian commander gave rise to Middle East tensions. Crude oil prices did drop after this event, but the price drop may have also been due to the price war between Russia and Saudi Arabia. This could have been a short-term move had it not been for inventory concerns during the coronavirus pandemic, which took crude prices much lower. Crude oil prices recovered after April 2020, and with the exception of the April low, the Brent-to-WTI spread has remained relatively narrow.
“Because crude oil impacts markets and industries worldwide, financial news outlets and traders across the globe closely monitor the rising and falling prices of crude oil futures,” Lewicky said.
And although West Texas Intermediate and Brent crude are two highly correlated commodities—their prices tend to move in a similar fashion—each crude oil benchmark might respond differently to geopolitical, local, and economic forces.
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