What is the difference between Brent crude and West Texas Intermediate (WTI)? Why is the price of the former superior to that of the latter?
Brent and WTI are the two major oil markets in the world. The first is the name given to relatively light crude oil made from a blend of crudes from 19 oil fields in the North Sea.
It is also the name of an oil field located in the North Sea off the coast of Scotland, discovered in 1971 and began production in 1976. Brent is an acronym for Broom, Rannoch, Etive, Ness and Tarbert, which are the five geological formations that make up the Middle Jurassic domain.
Brent is used as a benchmark for pricing two-thirds of global oil production, mainly in European and African markets.
In contrast, WTI is extracted in the United States, mainly from Texas. It is easy to refine and transport, and contains 0.24 percent sulfur. Brent crude contains 0.37 percent.
The lower the sulfur content in the oil, the “sweeter” the oil becomes, and the easier it is to refine. Both WTI and Brent crude are sweet oils.
Crude oil futures are traded on commodity exchanges: Brent crude is traded on the Intercontinental Exchange (ICE), while WTI is traded on the New York Mercantile Exchange (NYMEX).
Why is Brent priced higher than WTI?
Brent crude has been trading on the International Oil Exchange in London at a higher level than its US rival since 2010. On August 31, 2021, for example, West Texas Intermediate crude was trading at around $68.50 a barrel, while Brent crude was trading at $72.85.
The superiority of Brent crude over Texas crude is a result of its geographical location. Brent crude is produced near the sea, which makes transportation costs much lower. In contrast, Texas Light Crude is produced in landlocked areas, which makes transportation costs more difficult.
Another factor that can lead to significant differences between Brent and WTI is geopolitical problems. During times of crisis, the spread widens as political uncertainty drives up Brent crude prices. While Texas crude is less affected because it is located in landlocked areas in the United States.
How did the price move?
The oil market started heading higher in December, according to a detailed report by Capital.com.
A combination of factors drove the price, from rising demand amid lower-than-normal temperatures and a recovery in the global economy, to potential supply shortages and geopolitical concerns, including US nuclear talks with Iran and the Russia-Ukrainian war, according to the report.
Concerns about the balance of supply and demand for oil drove crude oil prices from a range of $60 a barrel in December 2021 to a level of $90 in mid-February. Then the markets jumped above $100 after the Russo-Ukrainian war on February 24, 2022.
By March 8, Brent crude reached $134.91, with WTI rising to $123.70 in response to US President Joe Biden’s announcement of a ban on imports of fossil fuels from Russia.
Then Brent and WTI prices fell again in mid-March, but rose again on March 23, despite falling to $121.60 and $114.93, respectively, after a storm disrupted crude oil exports from Russia. and Kazakhstan via the Caspian Sea pipeline.
Crude oil prices fell in April after President Joe Biden on March 31 authorized the immediate release of 1 million barrels of oil from the US Strategic Petroleum Reserve per day for six months to ease the sharp rise in prices.
The rise in Covid infections in China led to strict lockdowns that disrupted economic activity and reduced demand for oil from the world’s largest consumer, adding to the downward pressure.
Markets rebounded on April 18 as reports of a possible EU ban on Russian oil imports, supply disruptions in Libya outpaced the impact of the SPR release and concerns about a slowdown in China.
On Monday, US bank “Goldman Sachs” revised its forecast for the price of Brent crude for the current quarter to $110 a barrel, down from its previous forecast of $140 a barrel. But the investment bank still believes that the case for high oil prices is still strong.
Goldman Sachs said in a note that oil prices have fallen in recent weeks due to low trade liquidity and a “rising wall of concerns.” These include fears of a recession, the release of US Strategic Petroleum Reserve figures, a rebound in Russian crude oil production, and sudden Covid-related shutdowns in China.
Goldman Sachs also revised its fourth-quarter price forecast for Brent crude down to $125 a barrel from $130 previously expected.
In spite of all that, expectations for 2023 have not changed, standing at $125 per barrel.