WTI oil, along with other light grades, is a reference. Having the smallest amount of sulfur in its composition, WTI is applicable for the production of light fractions. Despite the fact that the European counterpart, Brent, is heavier, this brand managed to shift the view in question from the position of the price leader in 2011. For what reason this happened and what else you did not know about WTI, we will tell in the article.
Why is oil divided into grades?
For those who are fairly weakly familiar with the oil and gas industry, this question seems normal and reasonable. Constantly observing the news of the economy, the viewer is faced with such grades of oil as Brent, WTI, Urals, etc. Many people think: there is only one oil, and the chemical composition depending on the fields is different from each other. Some of them are lighter because of the small amount of sulfur, some are heavy because they contain more sulfur than the rest of the grades.
Given that a lower sulfur content leads to lower processing costs and the yield of light fractions, such as gasoline, kerosene, aviation fuel, light grades of oil have great competitive advantages, and the lightest of them are taken as reference ones. It is for this reason that oil is divided into grades. The price for each brand is formed relative to the exchange value of the reference oil.
Reference grades of oil
As noted above, to date, oil futures prices are formed on the basis of Brent and WTI crude oil quotes. The difference between them, in addition to chemical composition, is as follows:
- Brent is a marker of European oil produced in the North Sea. Serves as a guide when setting prices for black gold in the European and Asian regions. It is currently the benchmark for 70% of all fossil fuel export trade.
- WTI - a grade of oil, the value of which is based on pricing in the United States of America and Canada. For a long period in the twentieth century, it was this brand that was considered the single standard for all world trade, until in the 70s it was replaced by Brent.
What is WTI oil?
West Texas Intermediate (WTI) is a variety of American oil produced in Texas. WTI brand oil contains about 0.24% sulfur. Based on this, it is attributed to sweet crude (having less than 0.5% sulfur) oil. It is sweeter than Brent, which contains 0.37% sulfur. WTI is cleared mainly in the Midwest and Gulf Coast regions in the United States. In comparison, crude oil from the Bakken Formation in Montana, North and South Dakota is light at 43 degrees API. Heavy oil from the oil sands of Alberta, Mexico and the oil sands of Venezuela is estimated by the American Petroleum Institute at 20 degrees API.
Mexico buys US medium-grade WTI oil to mix it with heavy oil, which can then be exported to refineries that cannot process heavy oil. Thanks to this mix, Mexico gets a higher price and a wider international market for the sale of its oil, which can be exported, for example, to the People's Republic of China.
Standoff Standards
In February 2011, WTI crude oil quotes were at $ 85 per barrel. At that time, the price of Brent was $ 103 per barrel. The reason that most pointed to such a gap was that Mr. Cushing reached a peak in flow capacity due to an oversupply of oil within North America.
At the same time, Brent quotes rose in response to civil unrest in Egypt and the entire Middle East. Since WTI reserves at a price in Cushing could not be easily transported along the Gulf of Mexico, WTI crude oil could not be arbitrated to return these prices to equality.
Oil futures in the US coastal areas were closer to Brent than to WTI. In June 2012, the Seaway pipeline, which sent oil from the Gulf of Mexico to Cushing, changed its flow direction to transport WTI-priced oil to the Gulf of Mexico, whereby it was planned to achieve Brent quotes. However, the price difference persisted and was quite large, so some oil producers in North Dakota transported their product to tankers and sent it by rail to the Gulf of Mexico, as well as to the east, where it came at the same price as European oil marking.
However, Brent continued to cost $ 10–20 more than WTI for 2 years (until the 2nd quarter of 2013). By July 2013, this difference was reduced to $ 4. By January 2014, the spread between them again increased to more than $ 14, but by the end of 2014 it decreased to $ 4.
Current cost of oil
Final prices for Brent crude oil averaged $ 81 per barrel in October, $ 2 higher than the price of the same brand in September. Despite the increase in average monthly prices, spot prices for Brent crude oil fell from $ 85 per barrel, which was set on October 1 of this year, to $ 75 per barrel following the close of the session on October 31.
Forecasts for 2019
Experts from the International Energy Agency expect that spot prices for Brent will average $ 72 in 2019, and WTI fossil fuel prices will average about $ 7 per barrel lower than Brent prices in the coming period. The value of futures and options contracts of the New York Mercantile Exchange on WTI is expected to range from $ 53 to $ 83 per barrel. This will happen only if the confidence level is 95%.
For Russia, of course, this prospect is not just comforting, but the most attractive. As the Russian Federation continues to sit on an oil needle, an increase in oil prices will have a positive effect on the ruble exchange rate and macroeconomic stability.