To The Moon

Recently, a friend asked me what is the difference between Brent crude oil and WTI crude oil.

Today, I will make a special post to talk about it. Of course, a large part of the main content is written with reference to regular media sources.

At present, there are two mainstream crude oil futures Contract in the market: one is WTI contract $WTI Crude Oil - main 2305(CLmain)$ , and the other is Brent crude oil contract $Brent Last Day Financial - main 2306(BZmain)$ .

However, the actual name of the current Brent crude oil contract is called Brent crude Oil Cash Contract, which is a contract under Chicago Mercantile Exchange Group. Unlike the Brent crude oil contract that can be traded on the European Exchange, the Brent crude Oil Cash Contract tracks Brent Index, which is settled by financial means and does not involve the physical delivery of crude oil.

The specific difference between the two is as follows:

The WTI benchmark price was announced by NYMEX, a subsidiary of CME group. It is the main benchmark for pricing imported oil in the United States and domestic crude oil produced in North America (including Canada).WTI is sometimes called light and low sulfur crude oil because it belongs to low sulfur light crude oil.

WTI contract is the most actively traded energy futures contract in CME group's energy product series. WTI benchmark price is based on a series of crude oil blended products extracted in the mid-land region of the United States.

Brent is the second largest futures contract in CME group's petroleum benchmark product line.Different from WTI, this is a futures based on Brent index and Cash settled. The Brent index represents the reported price package for the last trading day of a futures contract. Its reported price is based on the crude oil output of four oil fields in the North Sea of Britain and Norway. The main grades on which the index is formed are Brent, Forties, Oseberg and Ekofisk. These levels are collectively called BFOE.

WTI and Brent crude oil futures contracts are listed on CME Globex and ClearPort and NYMEX trading floor. The third largest energy futures contract listed on CME Globex is Oman crude oil futures.

Oil demand is moving eastward

In the 2014 edition of BP's 2035 Energy Outlook report, it is well known that the energy demand in the East is rising. By 2035, BP estimates that Asia will account for 70% of the net energy imports between regions. This will establish Asia as a key region for price discovery. DME Oman products best represent the marginal barrels of oil production in Asia-Pacific region. However, WTI and Brent contracts are still the most actively traded products among all major energy futures contracts.

Asian producers adopt Brent benchmark

Brent (more specifically, shipping schedule Brent) is the traditional price reference for crude oil in Europe and Africa. Finally, Brent crude oil price is determined in Europe. The fundamentals affecting BFOE crude oil are more local factors in the North Sea.Asia is more based on Platts Dubai market price.

However, the crude oil portfolio is very large. Although the main "common price" discovery process is still controlled by several global crude oil benchmarks, interrelated markets have been developed to help the price discovery process in the physical market.One of the most active spreads traded in Asia is the Brent-Dubai swap (commonly referred to as the Brent/Dubai swap).

At the same time, more and more North Sea crude oil is flowing into the Asian market. Brent's global connectivity has grown in recent years, with a significant portion of that growth in Asia. Some oil-producing countries in Asia have reduced their investment in Tapis and Minas and adopted Brent as the basis for their crude oil sales.

WTI plays a more important role outside the United States

In North America, the shale gas (or tight oil) revolution has gradually pushed the United States to consider liberalizing restrictions on crude oil exports from the United States. If such a structural change occurs, it will affect the baseline development of the Atlantic Basin. Due to the development of tight oil, American crude oil is becoming very prominent. The role of WTI as an oil benchmark is beyond doubt.If the physical trading flow of crude oil in North America changes, the role of WTI will become more important in the future.

Financial participants and corporate traders in the United States and Europe are very active in Brent and WTI crude oil futures markets. Pricing is directly or indirectly related to physical contracts in upstream and downstream markets.

Reasons for using WTI and Brent in Asia

The Middle East is still one of the largest crude oil producing areas. However, most crude oil sold from the Middle East is on long-term supply contracts. In fact, there is no spot market except Platts Dubai-Oman and DME Oman. At present, major Middle East crude oil producers set their official selling prices to Asia based on Platts Dubai and Platts Oman assessments. Supported by the strong growth of Oman crude oil trading volume, DME Oman crude oil has gradually become the benchmark of eastern Zurich market.

Having said that, the price level of major crude oil benchmarks is determined in the futures market, and swaps and forwards are financial instruments that link futures prices with physical prices. Price reporting agencies (such as Platts, Argus and ICIS-Heren) actively assess the value of the spot market. The spot market usually trades relative to the benchmark price and adjusts relative to the benchmark price, which depends on the supply and demand of physical goods. WTI and Brent are the most liquid crude oil benchmark products.

Trade between WTI and Brent

Crude oil extracted from underground Texas is not the same as crude oil extracted from the North Sea. The key difference lies in density (known as API specific gravity index) and sulphur content. Traders price different types of oil on the world market based on these factors and according to WTI and Brent benchmark grades.

WTI traditionally trades at a slightly higher premium than Brent. This is because WTI has lower and lighter sulfur content than Brent, and the United States has historically been a marginal consumer of crude oil. However, the changing global demand pattern and geopolitical factors have made the pricing of Brent crude oil significantly higher than WTI crude oil for a long time since the global financial crisis.

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