WEST TEXAS INTERMEDIATE (WTI) CRUDE OIL EXPLAINED

What is West Texas Intermediate (WTI)?

West Texas Intermediate (WTI) is a grade of crude oil used as a benchmark in oil pricing. It is commonly referred to as “light sweet crude” due to its low density (lightness) and low sulphur content (sweetness). These qualities make it ideal for producing gasoline and other high-value petroleum products. Alongside Brent crude and Dubai/Oman, WTI is one of the main oil price benchmarks globally.

The term "WTI" specifically defines crude oil sourced primarily from oil fields in the United States, particularly Texas, Louisiana, and North Dakota. It is also the designated contract for crude oil futures traded on the New York Mercantile Exchange (NYMEX), making it a critical component of global energy markets.

WTI is delivered via pipeline to the storage hub in Cushing, Oklahoma—widely known as the pricing and delivery point for WTI futures contracts. Its physical characteristics, domestic production base, and centralised logistical operations contribute to its status as a reliable pricing benchmark for traders and refiners.

Due to its premium refining characteristics and infrastructure backbone, WTI plays a key role in shaping global oil pricing, particularly in North America. The benchmark is predominantly referenced in contracts and pricing formulas involving North American oil exports, particularly with growing U.S. crude exports to Europe and Asia.

Unlike other grades of crude oil, such as Brent (sourced primarily from the North Sea), WTI is produced inland rather than offshore, defining much of the logistical framework associated with it.

In global terms, WTI prices can be influenced by factors such as U.S. production levels, seasonal demand shifts, geopolitical conditions affecting U.S. energy policy, and storage capacity constraints at Cushing. WTI is generally perceived as a domestic benchmark with increasingly global implications.

In summary, West Texas Intermediate is both a specific physical oil type and a widely-used financial instrument. It serves as a crucial pillar of commodity markets, influencing short- and long-term strategies for producers, traders, refiners, and policymakers worldwide.

How is WTI crude priced and traded?

WTI crude oil pricing is closely tied to futures markets and logistics infrastructure in the United States. The primary pricing hub for WTI is Cushing, Oklahoma—a city located strategically at the intersection of several major crude oil pipelines. Cushing acts as both the delivery and settlement point for WTI crude oil futures contracts traded on the New York Mercantile Exchange (NYMEX), now operated by the CME Group.

The WTI futures contract is one of the most actively traded energy contracts in the world. It enables market participants to hedge exposures, speculate on price movements, and establish pricing benchmarks for physical transactions. Each NYMEX WTI crude oil futures contract covers 1,000 barrels of oil. The contracts are priced in U.S. dollars per barrel and deliverable into physical oil at Cushing.

The pricing of WTI is influenced by a multitude of factors:

• U.S. production and inventory levels: Higher domestic output or large inventories at Cushing can depress prices.
• Storage capacity: Limited storage at Cushing can result in volatile spot and futures pricing, as seen in April 2020 when WTI crude turned negative due to a storage glut.
• Pipelines and transportation: Any disruptions in pipeline infrastructure, such as Keystone or Seaway, can significantly impact WTI pricing.
• Macroeconomic indicators: U.S. dollar strength, interest rates, and economic growth also drive daily fluctuations.
• Global oil market dynamics: Although WTI is a U.S. benchmark, global events like OPEC+ decisions or geopolitical conflict can indirectly affect WTI prices through global supply-demand shifts.

Traders, refiners, hedge funds, and institutional investors often use WTI futures for risk management and arbitrage. For example, differences between WTI and Brent prices may present arbitrage opportunities, with traders analysing transportation costs and regional supply-demand dynamics.

In addition to futures, pricing formulas for physical WTI crude include differential pricing models tied to NYMEX futures. These formulas factor in location, quality premiums or discounts, and delivery schedules. For example, a shipment of WTI-quality oil delivered in Houston might be priced as NYMEX WTI futures plus or minus a differential that reflects Gulf Coast demand and maritime routes.

Over recent years, price transparency has improved due to broader trading in pipeline allowances, spot deals, and the inclusion of other benchmarks like Argus and Platts assessments. This has enhanced market efficiency and increased the role of WTI as a price signal beyond North America.

To sum up, WTI pricing is at the convergence of physical supply logistics, derivative trading, and global macroeconomic forces. The integration of pricing data from Cushing, active financial markets, and domestic U.S. characteristics helps ensure WTI remains a key benchmark for oil market participants, not only in North America but increasingly worldwide.

What makes WTI different from Brent?

West Texas Intermediate (WTI) and Brent are often compared as the two leading global crude oil benchmarks, yet they differ notably in origin, composition, delivery logistics, and pricing dynamics. Understanding these differences is vital for traders, policymakers, and industry analysts navigating the global energy landscape.

1. Geographic Origin and Logistics:

WTI is sourced primarily from inland oil fields in the United States—mainly Texas, Louisiana, and North Dakota. Its delivery point is Cushing, Oklahoma, a significant pipeline and storage hub. In contrast, Brent crude is extracted from offshore oil fields in the North Sea, primarily on the British and Norwegian continental shelves.

This inland versus offshore difference impacts their respective transportation logistics. WTI usually reaches refineries through domestic pipeline networks, while Brent is loaded onto tankers for maritime distribution. This makes Brent more flexible in terms of export logistics, especially to Europe and Asia.

2. Physical Characteristics:

Both WTI and Brent are classified as light sweet crudes due to their relatively low densities and sulphur contents. However, WTI is slightly lighter and sweeter than Brent, which enhances its desirability for producing gasoline and other refined products. Specifically:

• WTI: API gravity of ~39.6 and sulphur content ~0.24%
• Brent: API gravity of ~38.3 and sulphur content ~0.37%

These attributes result in minor adjustments in refining economics, with WTI occasionally trading at a premium to Brent when market conditions favour gasoline-focused refining.

3. Pricing and Market Influence:

WTI is priced on the NYMEX through futures contracts and is heavily influenced by U.S. domestic factors such as production trends, inventory levels, and logistical constraints. Brent, on the other hand, trades on Intercontinental Exchange (ICE) futures and is more exposed to global supply and demand dynamics, including geopolitics, seaborne trade, and OPEC+ actions.

Because of these differing exposures, Brent is generally considered a more global benchmark. It is used to price approximately two-thirds of the world’s internationally traded crude oil. WTI, while influential, primarily benchmarks U.S.-produced crude, with growing global relevance as U.S. exports increase.

4. Spot Market and Storage Impact:

A critical distinction is the storage capacity at Cushing, which has occasionally impacted WTI pricing significantly. For example, in April 2020, the unique convergence of oversupply and insufficient storage led to WTI futures briefly trading below zero—a phenomenon not seen with Brent due to its maritime flexibility.

5. Arbitrage Opportunities:

Differences in WTI and Brent prices create arbitrage opportunities. When WTI trades at a significant discount, U.S. exporters find it increasingly viable to ship crude oil overseas. Shipping constraints and cost differences between pipeline and tanker delivery often explain these price disparities.

6. Contract Terms and Delivery Mechanisms:

WTI futures are physically settled at Cushing, Oklahoma, at contract expiration, with defined quality and quantity rules enforced by the CME Group. Brent contracts are primarily cash-settled, referenced against assessments of several North Sea grades rather than a single stream.

In summary, WTI and Brent offer distinct reference points in global oil markets. WTI reflects U.S. inland supply dynamics, logistical networks, and domestic storage, whereas Brent reflects broader maritime trade considerations and global geopolitical risks. Both are vital tools for market transparency, pricing efficiency, and hedging strategies worldwide.