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What is the Difference between WTI and Brent Crude Oil?

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Light and Heavy Crude Oil• The difference has to do with the liquid density to water• Light crude oil refers to those with lower density• Heavy crude oil refers to those with higher density• The heavier the oil is, the harder it is to refine.• Light crude oil tends to trade at a premium in the

futures marketit is easier to refine and produces a greater amount of gasolineand diesel.

API Gravity• American Petroleum Institute gravity (API gravity) is a

measurement of the density of oil. • Falls between 10 and 70. • The higher the API gravity of the crude oil or liquid

petroleum the "lighter" it is. • If the API gravity is lower, it might be considered

"heavy“.• Light crude oil will float on water.• Heavy crude oil will sink in water.

Sweet and Sour Crude Oil• Refers to the sulfur content of oil• Oil with lower sulfur content is considered sweet• Oil with higher sulfur content is considered sour• The sulfur content is measured against a benchmark of

0.5%• If the sulfur content is higher, it is sour, if it is lower, it

is sweet.• Sweet crude oil trades at a premium• Similar to light, sweet crude is easier to refine and

produces more

Sweet Light vs Heavy Sour• At one end of the spectrum is sweet light & at the other

end is heavy sour• Along with other medium grades in the middle• Light sweet is preferred to the rest• Less processing necessary to refine the oil to remove

impurities to make fuels• Costs a pretty penny in futures market

Process of Refinement• Crude oil is used to produce various types of

fuel/petroleum products• Distillation converts the crude oil into petroleum

products • Distillation generally involved a heating and cooling

process• Distillation process separates the fuel from the

impurities

How is the crude oil used? • Sophistocated processes must be used to determine

how much of each barrel is refined into each type of fuel – depends on what the market demands• Maximizing production of highest value fuels while

minimizing the lowest value fuels at an optimal cost of production• Approx. 50% of each barrel is used to produce gasoline• Approx. 40% used to produce middle distillates• Approx. 10% produces residual fuel

Brent vs WTI• Two major trading classifications of crude oil • Both serve as major benchmarks for crude oil pricing

globally• Global oil pricing has moved in recent years to adopting

Brent as benchmark• 60% of world’s oil is now priced off of Brent

Brent• Refers to four different oil grades located in North Sea –

Brent blend, Forties blend, Osberg, and Ekofisk (BFOE)• Waterborne – transportation easier & cheaper• Can be offloaded from FSPO directly to tankers or

transported via pipeline to UK coast to be refined• API Gravity ≈ 38°• Sulfur ≈ .40%• Considered light and sweet

WTI Crude Oil• Extracted from wells located in the interior of the

United States• Wells located in Texas, Louisiana, North Dakota• Considered VERY light and VERY sweet• API Gravity ≈ 39.6°• Sulfur ≈ .24%• Landlocked crude oil – heavy reliance on pipelines and

rail fortransportation – more costly and onerous

Commodity Trading & Futures• Commodities, like crude oil, used to be traded on the

spot price• Futures were created to tie the price of crude oil to less

volatile crude oils• Futures allow a trader to lock in a price for contract of

purchase or sale months or years in advance• Brent & WTI have been used as the global benchmark

oils for futures market for decades

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Brent & WTI Daily Price Chart 2008-2016

BrentWTI

Date

Price

per

Bar

rel

2011 Divergence 2014 Convergence

Why is Brent taking over?• 2011 divergence may have contributed to increased

adoption of Brent as benchmark• The divergence has been attributed to many things:

• Laws of demand and supply at play• Gradual depletion of Brent in North Sea• Increased production in Canada• Oversupply of WTI – significant exceeded capacity of pipelines• WTI began being transported by rail – more expensive than

pipeline• Brent may be seen as more reliable indicator of

global oil prices

Oversupply & OPEC• Oil prices have been impacted significantly by global oil

glut • 20 January, OPEC oil basket price fell to USD 22.5 per

barrel • U.S. crude oil production not stopping• Iran expected to add 1 million barrels a day within six

months• Concerns over China’s economic slowdown• Consumption likely to wane• Prices likely to stay low

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