Analys
Brent and WTI – A tale of two benchmarks


Brent and West Texas Intermediate (WTI) are two globally recognised oil benchmarks. When market participants refer to the price of oil, they typically refer to one or the other or both. But despite having quite similar chemical properties, there are important distinguishing features between the two. Financial markets recognise these differences and, as a result, price the two differently. The two benchmarks have contrasting features in terms of where the oil is produced, how it is stored and transported and the way it is traded in international markets. These differences not only explain the historical price discrepancy between the two, but also help us understand why the two have behaved differently during the coronavirus pandemic and the ensuing market volatility. This article will contrast the distinguishing features between the two and, after developing a new lens to view the two benchmarks, replay the recent episode when WTI prices crashed into negative territory. The article will conclude by outlining the forces which will shape the fluid commodity going forward.
Same, same, but different
In ‘A tale of Two Cities’ by Charles Dickens, Sydney Carton sacrifices his life to save Charles Darnay, who is married to the woman Carton loves, by taking his place in prison moments before he is taken to the guillotine during the French revolution. He is able to pull off this selfless act of bravery thanks to the uncanny resemblance between him and Darnay. Similarly, most people would not be able to tell the difference if a barrel of WTI was replaced with one for Brent given the likeness between the two. Both Brent and WTI are referred to as light and sweet. They are ‘light’ in terms of the American Petroleum Institute (API) gravity. Having an API gravity greater than 10 makes them light and allows them to float on water, while an API gravity of less than 10 would have caused them to sink. Similarly, both have low sulphur content making them ‘sweet’ and easy to refine (See Figure 01).

But while Carton and Darnay looked alike, they were distinctly different individuals. Brent and WTI too, despite their resemblance, have their disparities. Brent Crude is extracted from the North Sea. Oil production from Europe, Africa and the Middle East tends to use Brent as its main benchmark. This accounts for around two-thirds of internationally traded crude oil. The Organisation of the Petroleum Exporting countries (OPEC), an intergovernmental organisation comprising 13 key oil producing countries as well as their 10 partner countries (collectively referred to as OPEC+), also typically use Brent as their oil price benchmark. In contrast, WTI is sourced primarily from Texas and most oil production in the US uses WTI as its main benchmark.

Brent and WTI have always traded at different prices giving rise to the Brent – WTI spread (Figure 02). Purely in terms of quality, WTI has a slight edge over Brent on account of its lower sulphur content making it moderately ‘sweeter’ and thus easier to refine. For this reason, WTI ought to theoretically trade at a premium over Brent. For a large part of the first decade of this century, WTI did indeed trade at a premium, i.e. the Brent – WTI spread was negative. Over the last decade however, the shale revolution in the US has brought large volumes of oil into the market making the US one of the largest oil producers in the world. The shale revolution refers to a combination of technological improvements and financial infrastructure enabling the US to produce oil from low-permeable shale, sandstone and carbonate rock formations in larger quantities than ever before. The shale oil industry has grown rapidly since 2011 and accounted for 63% of total US crude oil production in 2019 (according to the US Energy Information Administration). In line with economic principles of demand and supply, as the total volume of oil production increased in the US, this put downward pressure on WTI. The Brent – WTI spread has generally been positive in the last decade.
Another reason for the Brent – WTI spread is the logistical challenge for the US to transport oil from landlocked production hubs through a network of pipelines and to ship it overseas. This impinges on the overseas demand for oil from the US (WTI). In contrast, Brent is produced at or closer to sea making it easier for it to reach its overseas destinations. The US is however investing heavily in its pipeline infrastructure to enable it to send large vessels of oil from its shores to international buyers. Several such infrastructure projects are expected to be completed by 2021-2022 when we might see an increase in demand for WTI and thus a narrowing of its spread with Brent.
The historic WTI crash
The explanation above of the spread between the two benchmarks omits any discussion about the unprecedented spike on 20 April 2020. This section will unravel the story behind the anomalous occurrence.
On Monday 20 April 2020, markets witnessed a historic crash in WTI prices (Figure 03). The crash occurred a day before the active Nymex WTI futures contract was due to expire. This contract, meant to deliver oil between 01 May and 31 May, crashed into negative territory as oil storage in the US became very tight. With the coronavirus pandemic causing considerable oil demand destruction putting entire countries in lockdown and bringing economic activity to a grinding halt, the reduction in oil production was not enough to balance the market creating a supply glut. The main delivery and settlement point in Cushing, Oklahoma was approaching its storage limit with any additional capacity likely already leased out or earmarked for other purposes. This acute pressure, so close to contract expiry at the point where contracts settle, contributed to the negative price. Those taking physical delivery from the expiring futures contract were being paid to take the oil and find a place to store it. The May contract expired the following day in slightly positive territory. When the June contract became the active contract upon the May contract’s expiry, prices recovered further as the issue of June deliveries creating the same problem was less worrying, at least at that point.

But Brent did not endure a similar crash. The main reason for this is that WTI, traded on the New York Mercantile Exchange (NYMEX), is a deliverable futures contract. Thus, upon expiry, the holder of the futures contract takes delivery of the underlying, i.e. barrels of oil. Brent however, traded on the Intercontinental Exchange (ICE), has a cash settlement procedure whereby the holder of the futures contract need not take delivery of the underlying upon expiry. Therefore, storage issues create a more direct risk to investors in WTI futures.
Outside of this idiosyncrasy pertaining to futures trading, the two benchmarks generally move with a high degree of correlation (Figure 04). At the peak of the coronavirus pandemic’s acceleration in April, a third of global oil demand was wiped out. Soon thereafter, major oil producers Saudi Arabia and Russia engaged in a price war. This created a double shock for oil as the suppliers opened the floodgates at a time when demand had just crashed. Both benchmarks experienced severe price weakness. But as policy decisions from OPEC+ can be expected to impact Brent prices more than WTI, the deal reached by the group at the start of April to cut suppliesprovided slightly more cushioning to Brent.

What happens next?
With a deeper understanding of the drivers of the two benchmarks, historic and recent price behaviour makes more sense. But the all-important question is, “what happens next?”. The fate of oil prices rests heavily on how quickly the world can overcome the pandemic and get the economic engines firing again. Volatility in oil prices may persist in the coming weeks, or even months, until uncertainty with regards to the pandemic and lockdowns diminishes. The relative price behaviour of WTI and Brent during this period will depend on the degree to which producers in the US and OPEC+ cut supplies to balance the market.
We however hope to paint a more optimistic picture of the world in the second half of this year. Oil prices may not recover quickly to where they were in February this year due to an overhang of excess supply, a fractured OPEC+ and a dented global economic engine. Nonetheless, after all the pain, the world will eventually return to some semblance of normalcy. Manufacturers will switch their machines on again, cars will return to the roads and aeroplanes will return to the skies. Once again, oil is expected to be in demand. And while one protagonist had to sacrifice himself to save the other in the tale told by Dickens, we expect both mainstays from the tale of two benchmarks to rise again when the crisis is over.
Mobeen Tahir, Associate Director, Research, WisdomTree
DISCLAIMER
This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.
Analys
Crude stocks fall again – diesel tightness persists

U.S. commercial crude inventories posted another draw last week, falling by 2.4 million barrels to 418.3 million barrels, according to the latest DOE report. Inventories are now 6% below the five-year seasonal average, underlining a persistently tight supply picture as we move into the post-peak demand season.

While the draw was smaller than last week’s 6 million barrel decline, the trend remains consistent with seasonal patterns. Current inventories are still well below the 2015–2022 average of around 449 million barrels.
Gasoline inventories dropped by 1.2 million barrels and are now close to the five-year average. The breakdown showed a modest increase in finished gasoline offset by a decline in blending components – hinting at steady end-user demand.
Diesel inventories saw yet another sharp move, falling by 1.8 million barrels. Stocks are now 15% below the five-year average, pointing to sustained tightness in middle distillates. In fact, diesel remains the most undersupplied segment, with current inventory levels at the very low end of the historical range (see page 3 attached).
Total commercial petroleum inventories – including crude and products but excluding the SPR – fell by 4.4 million barrels on the week, bringing total inventories to approximately 1,259 million barrels. Despite rising refinery utilization at 94.6%, the broader inventory complex remains structurally tight.
On the demand side, the DOE’s ‘products supplied’ metric – a proxy for implied consumption – stayed strong. Total product demand averaged 21.2 million barrels per day over the last four weeks, up 2.5% YoY. Diesel and jet fuel were the standouts, up 7.7% and 1.7%, respectively, while gasoline demand softened slightly, down 1.1% YoY. The figures reflect a still-solid late-summer demand environment, particularly in industrial and freight-related sectors.


Analys
Increasing risk that OPEC+ will unwind the last 1.65 mb/d of cuts when they meet on 7 September

Pushed higher by falling US inventories and positive Jackson Hall signals. Brent crude traded up 2.9% last week to a close of $67.73/b. It traded between $65.3/b and $68.0/b with the low early in the week and the high on Friday. US oil inventory draws together with positive signals from Powel at Jackson Hall signaling that rate cuts are highly likely helped to drive both oil and equities higher.

Ticking higher for a fourth day in a row. Bank holiday in the UK calls for muted European session. Brent crude is inching 0.2% higher this morning to $67.9/b which if it holds will be the fourth trading day in a row with gains. Price action in the European session will likely be quite muted due to bank holiday in the UK today.
OPEC+ is lifting production but we keep waiting for the surplus to show up. The rapid unwinding of voluntary cuts by OPEC+ has placed the market in a waiting position. Waiting for the surplus to emerge and materialize. Waiting for OECD stocks to rise rapidly and visibly. Waiting for US crude and product stocks to rise. Waiting for crude oil forward curves to bend into proper contango. Waiting for increasing supply of medium sour crude from OPEC+ to push sour cracks lower and to push Mid-East sour crudes to increasing discounts to light sweet Brent crude. In anticipation of this the market has traded Brent and WTI crude benchmarks up to $10/b lower than what solely looking at present OECD inventories, US inventories and front-end backwardation would have warranted.
Quite a few pockets of strength. Dubai sour crude is trading at a premium to Brent crude! The front-end of the crude oil curves are still in backwardation. High sulfur fuel oil in ARA has weakened from parity with Brent crude in May, but is still only trading at a discount of $5.6/b to Brent versus a more normal discount of $10/b. ARA middle distillates are trading at a premium of $25/b versus Brent crude versus a more normal $15-20/b. US crude stocks are at the lowest seasonal level since 2018. And lastly, the Dubai sour crude marker is trading a premium to Brent crude (light sweet crude in Europe) as highlighted by Bloomberg this morning. Dubai is normally at a discount to Brent. With more medium sour crude from OPEC+ in general and the Middle East specifically, the widespread and natural expectation has been that Dubai should trade at an increasing discount to Brent. the opposite has happened. Dubai traded at a discount of $2.3/b to Brent in early June. Dubai has since then been on a steady strengthening path versus Brent crude and Dubai is today trading at a premium of $1.3/b. Quite unusual in general but especially so now that OPEC+ is supposed to produce more.
This makes the upcoming OPEC+ meeting on 7 September even more of a thrill. At stake is the next and last layer of 1.65 mb/d of voluntary cuts to unwind. The market described above shows pockets of strength blinking here and there. This clearly increases the chance that OPEC+ decides to unwind the remaining 1.65 mb/d of voluntary cuts when they meet on 7 September to discuss production in October. Though maybe they split it over two or three months of unwind. After that the group can start again with a clean slate and discuss OPEC+ wide cuts rather than voluntary cuts by a sub-group. That paves the way for OPEC+ wide cuts into Q1-26 where a large surplus is projected unless the group kicks in with cuts.
The Dubai medium sour crude oil marker usually trades at a discount to Brent crude. More oil from the Middle East as they unwind cuts should make that discount to Brent crude even more pronounced. Dubai has instead traded steadily stronger versus Brent since late May.

The Brent crude oil forward curve (latest in white) keeps stuck in backwardation at the front end of the curve. I.e. it is still a tight crude oil market at present. The smile-effect is the market anticipation of surplus down the road.

Analys
Brent edges higher as India–Russia oil trade draws U.S. ire and Powell takes the stage at Jackson Hole

Best price since early August. Brent crude gained 1.2% yesterday to settle at USD 67.67/b, the highest close since early August and the second day of gains. Prices traded to an intraday low of USD 66.74/b before closing up on the day. This morning Brent is ticking slightly higher at USD 67.76/b as the market steadies ahead of Fed Chair Jerome Powell’s Jackson Hole speech later today.

No Russia/Ukraine peace in sight and India getting heat from US over imports of Russian oil. Yesterday’s price action was driven by renewed geopolitical tension and steady underlying demand. Stalled ceasefire talks between Russia and Ukraine helped maintain a modest risk premium, while the spotlight turned to India’s continued imports of Russian crude. Trump sharply criticized New Delhi’s purchases, threatening higher tariffs and possible sanctions. His administration has already announced tariff hikes on Indian goods from 25% to 50% later this month. India has pushed back, defending its right to diversify crude sourcing and highlighting that it also buys oil from the U.S. Moscow meanwhile reaffirmed its commitment to supply India, deepening the impression that global energy flows are becoming increasingly politicized.
Holding steady this morning awaiting Powell’s address at Jackson Hall. This morning the main market focus is Powell’s address at Jackson Hole. It is set to be the key event for markets today, with traders parsing every word for signals on the Fed’s policy path. A September rate cut is still the base case but the odds have slipped from almost certainty earlier this month to around three-quarters. Sticky inflation data have tempered expectations, raising the stakes for Powell to strike the right balance between growth concerns and inflation risks. His tone will shape global risk sentiment into the weekend and will be closely watched for implications on the oil demand outlook.
For now, oil is holding steady with geopolitical frictions lending support and macro uncertainty keeping gains in check.
Oil market is starting to think and worry about next OPEC+ meeting on 7 September. While still a good two weeks to go, the next OPEC+ meeting on 7 September will be crucial for the oil market. After approving hefty production hikes in August and September, the question is now whether the group will also unwind the remaining 1.65 million bpd of voluntary cuts. Thereby completing the full phase-out of voluntary reductions well ahead of schedule. The decision will test OPEC+’s balancing act between volume-driven influence and price stability. The gathering on 7 September may give the clearest signal yet of whether the group will pause, pivot, or press ahead.
-
Nyheter3 veckor sedan
Omgående mångmiljardfiasko för Equinors satsning på Ørsted och vindkraft
-
Nyheter4 veckor sedan
Lundin Gold hittar ny koppar-guld-fyndighet vid Fruta del Norte-gruvan
-
Nyheter1 vecka sedan
Meta bygger ett AI-datacenter på 5 GW och 2,25 GW gaskraftverk
-
Nyheter3 veckor sedan
Guld stiger till över 3500 USD på osäkerhet i världen
-
Analys3 veckor sedan
What OPEC+ is doing, what it is saying and what we are hearing
-
Nyheter4 veckor sedan
Alkane Resources och Mandalay Resources har gått samman, aktör inom guld och antimon
-
Nyheter2 veckor sedan
Aker BP gör ett av Norges största oljefynd på ett decennium, stärker resurserna i Yggdrasilområdet
-
Nyheter3 veckor sedan
Lyten, tillverkare av litium-svavelbatterier, tar över Northvolts tillgångar i Sverige och Tyskland