October 25, 2016
A Dynamic Commodities Exclusive
Oil is perhaps the most liquid and closely watched commodity in the world. The world depends on energy and the price of oil affects individuals, companies and particularly those involved in the international petroleum businesses.
When it comes to crude oil, there are different types of physical petroleum. The most popular traded grades are Brent crude oil and West Texas Intermediate (WTI). Brent refers to oil produced from the Brent oilfield and other sites in the North Sea. Brent is the benchmark pricing mechanism for European, African, and Middle Eastern crude oils. The pricing mechanism for Brent crude values roughly two-thirds of the world’s oil supplies. Brent is “sweet” crude, which means it has a sulfur content of less than 0.5 percent. Brent’s sulfur content is around 0.37 percent. The lower the sulfur content, the easier and cheaper crude is to refine into products, like gasoline.
WTI is the benchmark crude for North America. With a sulfur content of around 0.24 percent, it is “sweeter” than Brent crude oil. While WTI is a better grade of oil for processing into gasoline, Brent oil tends to favor the production of other petroleum products like distillates such as heating oil and diesel fuels.
WTI crude oil futures contracts trade on the New York Mercantile (NYMEX) division of the Chicago Mercantile Exchange (CME), and its delivery point is Cushing, Oklahoma. Meanwhile, Brent crude oil futures contracts trade on the Intercontinental Exchange (ICE). Many Asian countries use a combination of both Brent and WTI futures benchmarks to price their crude oil requirements.
Over the course of history, since WTI is a “sweeter” crude oil and is more efficient when it comes to the production of the world’s most ubiquitous oil product, gasoline, WTI tends to trade at a premium to Brent crude oil. However, since the Arab Spring in 2010, Brent has commanded a premium to WTI. The reason for a higher price for Brent crude has been because of the political risk associated with exploration, production, and logistical issues when it comes to crude oils produced in the Middle East where more than 50% of the world’s proven and probable reserves occur.
There are many other types of crude oil produced all over the world, and they trade at premiums or discounts to WTI and Brent prices depending on their specific gravity and sulfur levels. However, Brent and WTI remain the most liquid crude oils and are benchmarks watched and used all around the world.