WTI vs. Brent

According to the International Crude Oil Market Handbook  2004 published by the Energy Intelligence Group, there are about 161 different internationally traded crude oils. They vary in terms of characteristics, quality and market penetration. Two crude oils which are either traded themselves or whose prices are reflected in other types of crude oil include West Texas Intermediate and Brent.

The New York Mercantile Exchange (NYMEX) is the worlds’t largest physical commodity futures exchange, located in New York City. The prices settled each day on the Exchange for crude oil and other forms or energy are closely monitored by business and financial analysts around the world. They strongly influence economic conditions and they directly affect consumers via the cost of motor gasoline, heating fuels, air line tickets and many other goods and services.

The New York Mercantile Exchange handles billions of dollars worth of energy products, metals and other commodities being bought and sold on the trading floor and the overnight electronic trading computer systems. The prices quoted for transactions on the exchange are the basis for prices that people pay for various commodities throughout the world.

NYMEX plays a fundamental role in the formation of the day-one-day price of global crude oil prices. Crude oil is the raw material that is refined to produce gasoline, heating oil, diesel, jet fuel and petrochemicals. As a result, changes in crude oil prices affect the cost of many energy and non-energy goods and services to households, businesses and governments.

Crude oil began futures trading on the NYMEX in 1983 and is the most heavily traded commodity. The complete list of trading markets provided by NYMEX includes:

  • Futures and option contracts for crude oil, gasoline, heating oil, natural gas and electricity
  • Future contracts for coal and propane
  • Option contracts on the price differentials between crude oil and gasoline, crude oil and heating oil, Brent and West Texas Intermediate crude oil, and various futures contract months (calendar spreads) for light, sweet crude, Brent crude, gasoline, heating oil and natural gas

NYMEX’s oil futures contracts were standardized for the delivery of West Texas Intermediate (WTI), sweet crude oil to Cushing, Oklahoma. Also known as Texas light sweet, the WTI is of very high quality and is excellent for refining a larger portion of gasoline. Its API gravity is 39.6 degrees (making it a « light » crude oil)  and it contains only about 0.24 percent of sulfur (making it a « sweet » crude oil). This combination of characteristics, combined with its location, makes it an ideal crude oil to be refined in the United States, the largest gasoline consuming country in the world. Most WTI crude oil get refined in the Midwest region of the country. Although the production of WTI is on the decline, it still the major benchmark of crude oil in the Americas.

Brent Crude, which is the other major trading classification of sweet light crude oil, is actually a combination of crude oil from 15 different oil fields in the Brent and Ninian systems located in the North Sea. Its API gravity is 38.3 degrees (making it a « light » crude oil, but not quite as « light » as WTI), while it contains about 0.37 percent of sulfur (making it a « sweet » crude oil, but again slightly less than « sweet » than WTI). Brent blend is ideal for making gasoline and middle distillates, both of which are consumed in large quantities in Northwest Europe, where Brent blend crude oil is typically refined. However, if the arbitrage between Brent and other crude oils, including WTI, is favorable for export, Brent has been known to be refined in the United States or the Mediterranean region. Brent Crude, like WTI, production is also on the decline, but it remains the major benchmark for other crude oils in Europe or Africa. Futhermore, Brent futures are traded on both the ICE* and NYMEX exchanges, with delivery dates for all 12 months of the year.

* A futures contract is supply contract between a buyer and seller, whereby the buyer is obligated to take delivery and the seller is obligated to provide delivery of a fixed amount of a commodity at a predetermined price at a specified location. Futures contract are traded exclusively on regulated exchanges and are settled daily based on their current value in the marketplace.

* Futures contract are most widely used for hedging. Hedging allows someone to offset the risk of fluctuating prices when he or she buys or sells physical supplies of a commodity.

* An option is contract that gives the holder the right, but not the obligation, to purchase or to sell the underlying futures contact at a specified price within a specified period of time in exchange for a one-time premium payment. The contract also obligates the writter who receives the premium to meet these obligations.

* IntercontinentalExchange, Inc., known as ICE, is an american financial company that operates Internet-based marketplaces which trade futures and over-the-counter (OTC) energy and commodity contracts as well as derivative financial products

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