What Is West Texas Intermediate (WTI)?
West Texas Intermediate (WTI) crude oil is a specific grade of crude oil and one of the main three benchmarks in oil pricing, along with Brent and Dubai Crude. WTI is known as a light sweet oil because it contains around 0.34% sulfur, making it "sweet," and has a low density (specific gravity), making it "light."
WTI is the underlying commodity of the New York Mercantile Exchange's (NYMEX) oil futures contract and is considered a high-quality oil that is easily refined.
- West Texas Intermediate (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, which is easy to refine.
- WTI is the underlying commodity for the NYMEX's oil futures contract.
- WTI is often compared to Brent crude, which is an oil benchmark for two-thirds of the world's oil contracts based on oil extracted in the North Sea.
Understanding West Texas Intermediate (WTI)
WTI is the main oil benchmark for North America as it is sourced from the United States, primarily from the Permian Basin. The oil comes mainly from Texas. It then travels through pipelines where it is refined in the Midwest and the Gulf of Mexico. The main delivery point for physical exchange and price settlement for WTI is Cushing, Oklahoma.
The Cushing hub delivery system consists of 35 (20 inbound and 15 outbound) pipelines and 16 storage terminals. The hub has 90 million barrels of storage capacity and accounts for 13% of U.S. oil storage. The inbound and outbound capacity is 6.5 million barrels a day. Cushing is known as "The Pipeline Crossroads of the World."
West Texas Intermediate as an Oil Market Benchmark
The significance of a benchmark in the oil market is that benchmarks serve as a reference price for buyers and sellers of crude oil. Oil benchmarks are frequently quoted in the media as the price of oil. Though Brent crude and WTI crude are the most popular benchmarks, their prices are often contrasted. The difference in price between Brent and WTI is called the Brent-WTI spread.
WTI is not the most commonly used benchmark globally, that honor goes to Brent, where two-thirds of oil contracts globally use Brent as a benchmark. Both, however, are considered high-quality oils and are therefore the two most important oil benchmarks in the world. As mentioned, WTI has a sulfur content of 0.24%, whereas Brent has a sulfur content of 0.37%. The lower the sulfur content of an oil, the easier it is to refine, making it more attractive. A sulfur content below 0.5% is considered sweet. WTI is ideal for gasoline whereas Brent is ideal for diesel.
Theoretically, WTI crude should trade at a premium to Brent crude, given the quality, but this is not always the case. While the two crude oil varieties can trade at similar price points, each one has its own unique supply and demand market, and therefore its price reflects its individual market fundamentals.
Since the shale boom in the U.S., which resulted in a production increase of WTI, the price of WTI has gone down and usually trades at a discount to Brent. Furthermore, transporting WTI overseas to Brent crude's market could come at a cost that would make WTI unable to compete with Brent crude in terms of pricing.
Price Collapse Following COVID-19
Notably, 2020 saw the collapse of crude oil prices as demand disappeared due to the global economic shutdown that paralyzed the world's economies. Oil prices fell more than 90% as the industry was plagued with overproduction and disappearing demand. On April 20, the May contract for WTI futures fell below zero for the first time, the day before the contract expired.