West Texas Intermediate WTI Definition and Use as a Benchmark
West Texas Intermediate (WTI) crude oil is a specific grade and one of the main benchmarks in oil pricing, along with Brent and Dubai Crude. WTI is considered a light sweet oil because it contains less than 0.50% sulfur, making it sweet, and has a low density making it light.
WTI is the underlying commodity of the New York Mercantile Exchange’s (NYMEX) oil futures contract and is easily refined.
Key Takeaways:
– WTI is a light, sweet crude oil that serves as one of the main global oil benchmarks.
– It is sourced primarily from inland Texas and is one of the highest quality oils in the world.
– WTI is the underlying commodity for the NYMEX’s oil futures contract.
– WTI is often compared to Brent crude, an oil benchmark for two-thirds of the world’s oil contracts.
WTI is the main oil benchmark for North America and primarily sourced from the Permian Basin in the United States. The oil is then refined in the Midwest and the Gulf of Mexico. The main delivery point for WTI is Cushing, Oklahoma.
The Cushing hub delivery system consists of 35 pipelines and 16 storage terminals, with a storage capacity of 90 million barrels. Cushing acts as "The Pipeline Crossroads of the World."
The significance of oil benchmarks is that they serve as a reference price for buyers and sellers of crude oil. Though Brent and WTI crude are the most popular benchmarks, their prices are often contrasted, and the difference in price is called the Brent-WTI spread.
While Brent is the most commonly used benchmark globally, WTI remains an important benchmark as well. Both benchmarks are considered high-quality oils, but WTI has a lower sulfur content, making it easier to refine.
Theoretically, WTI crude should trade at a premium to Brent crude, given its higher quality. However, the shale boom in the U.S. has resulted in increased production of WTI, causing its price to typically trade at a discount to Brent. Brent is also tied to more worldwide oil markets and serves as an international benchmark, which further influences its price. Additionally, transporting WTI overseas to Brent crude’s market could incur costs that hinder its ability to compete with Brent crude in terms of pricing.
