Understanding Crude Antiques: WTI and Brent

Does it matter which oil price you monitor, and which is more reliable as a marker of broader market activity?

Morningstar.co.uk Editors 13 September, 2011 | 6:08PM
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It is commonly understood that West Texas Intermediate (WTI) and Brent are grades of crude oil used as benchmarks in oil pricing. Historically, WTI and Brent have traded close to each other, with the price of WTI slightly higher; Brent crude is considered inferior to WTI and is therefore usually slightly cheaper. In 2011, however, this relationship became distorted and even reversed. Back in June 2011, the International Energy Agency (IEA) pointed out that while between 1994 and 2010 WTI futures have on average traded 5% higher than Brent futures, in 2011 Brent stood an average 13% higher. At the onset of the third quarter of this year, the Brent-WTI spread is still near all-time highs, with Brent futures currently trading over $23 per barrel higher than WTI.

This years price anomalies in crude futures can to a large extent be attributed to the geographical location of the respective oil fields, refineries and storage facilities. Stemming from this distinction is also the various degrees to which turmoil in the Middle East and North Africa--most recently in oil-rich Libya--has impacted demand for the two classes of oil.

WTI Price Distortions
WTI, also known as West Texas light crude, as the name implies, is extracted in North America. WTI is the underlying commodity for oil futures traded at the Chicago Mercantile Exchange. Importantly, the main delivery facility for WTI is a land-locked facility in Cushing, Oklahoma.

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Morningstar.co.uk Editors  analyse and report on shares, funds, market developments and good investing practice for individual investors and their advisers in the UK.