If you want to learn about oil trading, the first thing to do is learn the difference between Brent crude oil and West Texas Intermediate (WTI) crude oil. These are the two types of crude oil you’ll find traded on U.S. exchanges. In this article, we share all you need to know about Brent vs WTI crude oils, including the differences between the two, what influences their pricing.
The basics of crude oil benchmarks
Definition of Brent crude and WTI oil
Brent crude and WTI oil are two major benchmarks in the global oil market. When you hear people talking about oil prices, they’re usually referring to one of these two.
Brent crude is a blend of four different oil streams (Brent, Forties, Oseberg, and Ekofisk) extracted from the North Sea off the coast of the UK and Norway. It’s made up of a blend of light and sweet crude oils and is a global benchmark used for oil prices across the Middle East, Europe, and Africa.
WTI, which stands for West Texas Intermediate, is a blend of several oils sourced from oil fields in the United States. Like Brent, WTI is light and sweet, but it’s mainly used as the benchmark for oil prices in North America.
Why benchmarks are important
Oil benchmarks are important because they help standardize global oil prices. Instead of having to negotiate the price of each shipment, buyers and producers can refer to these benchmarks to value their oil.
As mentioned earlier, Brent crude is the benchmark used for the wider oil market (Europe, Africa, and the Middle East) while WTI is the benchmark for the U.S. There are other benchmarks, like Dubai crude and Oman crude, which are used for the heavy and sour crude oil market as opposed to the light oil market.
Comparing oil vs crude oil
Before we get any deeper into this article, let’s clarify the difference between oil, crude oil, and other refined products.
Crude oil is unrefined petroleum taken straight from the ground. After it has been processed at a refinery, crude oil becomes the regular, everyday fuels we know and use, like diesel, gasoline, jet fuel, kerosene, LPG etc.
Other products derived from crude oil through the refining process include asphalt, lubricating oils, petroleum coke, and bitumen.
What does light and sweet mean in crude oil?
Crude oil can be classified into light or heavy (based on density) and sweet or sour (based on sulfur content).
Light crude oil is less dense and easier to refine into gasoline and other fuels. Oil density is measured based on American Petroleum Institute (API) gravity, with a scale between 10 and 70 where lighter oils have higher API gravity numbers. Light crude oil has an API gravity between 35 to 45.
Sweet crude oil doesn’t refer to its taste but rather to the oil’s sulfur content. Oil with a sulfur content below 0.5% is considered sweet, while a sulfur content higher than 0.5% is classified as sour. Again, sweeter oils are easier to refine into gasoline and other petroleum-based products.
Brent crude and WTI are both considered light and sweet, which is why they’re so valuable and widely used to benchmark oil prices.
Key differences between Brent crude and WTI
Even though Brent and WTI are both light and sweet crude oils, they differ in many ways. Let’s look at some of the main differences between the two.
Extraction and location
Brent crude is sourced offshore in the North Sea near Europe, from fields like Brent, Forties, Ekofisk, and Oseberg. Being extracted offshore gives the oil a few logistic advantages. For example, large volumes can be easily transported via underwater pipelines or ships.
WTI, on the other hand, is extracted from inland oil fields in Texas, Louisiana, and North Dakota. The oil's main delivery point in Cushing, Oklahoma is landlocked and far from where most oil and refined products need to go. This makes transportation more difficult compared to Brent.
Composition and quality
Brent has an API gravity of 38.0 and a sulfur content of 0.37%, while WTI has an API gravity of 39.6 and sulfur content of 0.24%. This means that WTI is lighter and sweeter than Brent, making it easier and cheaper to refine into gasoline.
Trading and pricing mechanisms
Brent and WTI are traded on different exchanges. Brent crude trades on the Intercontinental Exchange (ICE) in Europe, while WTI trades on the New York Mercantile Exchange (NYMEX).
Geopolitical influences
Brent crude prices are more sensitive to global political events, while WTI is affected more by U.S. domestic factors. For example, a political event in North America would be more likely to affect WTI than Brent. Tensions in the Middle East, however, are likely to influence Brent more than WTI.
The pricing differential
Brent and WTI prices often move together, but they’re not always the same. The difference between their two prices is called the Brent-WTI spread, and the spread can widen due to supply and demand.
For example, during the Arab Spring of 2011, Brent’s spot price reached $126.65 per barrel amidst fears of reduced supply, while WTI stayed at $112.79.
Another example was during the 2020 COVID pandemic, when WTI briefly crashed from $18 per barrel to -$38 due to a storage crisis. During the same period, Brent stayed above $20.
How to trade Brent and WTI
If you want to gain exposure to global oil prices, there are several ways you can trade Brent crude and WTI oils.
Futures contracts
One of the most direct ways to trade Brent and WTI is through oil futures contracts. These let you lock in a price to buy or sell oil at a set date in the future. The most widely traded oil futures are:
- WTI Crude Oil contracts (CL), traded on the New York Mercantile Exchange (NYMEX), which is part of the CME Group
- Brent Crude Oil futures are mainly traded on the Intercontinental Exchange (ICE), but CME lists a Brent Crude contract (BZ), which is traded at a lower volume.
Trading futures is popular amongst traders with a longer-term view, because you can hold positions overnight without having to pay an extra fee. That said, it comes with a steep learning curve and requires an approved brokerage account, so this option is best suited for experienced traders.
Trading using options
You can also trade crude oil options, which give you the right, but not the obligation, to buy or sell an oil futures contract at a set price before a specific expiration date.
Options offer leverage and can be used for hedging, but their prices are complex and influenced by volatility and expiration dates. Like futures, they’re more suited for experienced traders. However, trading with leverage increases risk and may not be suitable for all investors.
Gaining exposure through ETFs and oil-related shares
If futures or options feel too complex, you can also get oil exposure by buying individual oil stocks or investing in exchange-traded funds (ETFs).
Investing in oil stocks gives you indirect exposure to oil prices, plus the potential benefit of dividends and long-term growth. The biggest publicly-listed integrated oil companies are Exxon Mobil (XOM), BP (BP), Chevron (CVS), and Shell (SHEL).
Another option is ETFs, which track the performance of the oil market. Some popular crude oil ETFs include United States Oil Fund LP (USO), ProShares Ultra Bloomberg Crude Oil (UCO), Invesco DB Oil Fund (DBO), and ProShares UltraShort Bloomberg Crude Oil (SCO).
There are currently no oil ETFs in the EU due to regulations.
Investing via CFDs and spread bets
Traders outside the U.S. can use Contracts for Difference (CFDs) or spread bets to speculate on oil prices without owning the underlying asset. However, these options aren’t available to U.S. residents due to regulatory restrictions.
Market dynamics that affect Brent and WTI
Global supply and demand
Like all commodities, crude oil prices are driven by supply and demand. When there’s a rise in global demand (i.e. during the summer months), prices go up, and when there’s a decline in demand, prices go down.
Supply and oil production also plays a role. If there are new resources that add to global oil supply, like Canadian oil sands or U.S. crude oil from oil shale, they’ll exert downward pressure on oil prices even if there’s heavy demand.
Political and environmental events
Politics and environmental issues can also impact oil markets. For example, oil prices increased after the Iranian revolution in the 1970s and decreased during the 2020 COVID pandemic since oil consumption was predicted to be much lower than usual. Again, Brent tends to be more sensitive to Middle East tensions and global conflicts, while WTI is more influenced by things happening in the U.S.
Technological developments and climate policies also affect oil prices. For example, the global push for renewable energy is slowly shifting demand away from fossil fuels, adding a layer of uncertainty when it comes to long-term oil prices.
Brent-WTI spread behavior
To recap, the Brent WTI spread is the difference between these two crude oil prices. Since 2016, Brent has been trading at a premium (i.e. it costs more per barrel than WTI) because it’s easier to ship worldwide. But sometimes, there are anomalies or shifts that cause the spread to widen, narrow, or even invert.
You can keep track of the Brent-WTI spread through various charts, such as this one.
