WTI as an oil benchmark
WTI is used as a benchmark for the US oil market because it is drilled from inland US states such as Texas, Louisiana and North Dakota. This means that there is restricted access to shipping ports and subsequent world transport links.
Another major benchmark used on the crude oil market is Brent crude, which is drilled in the North Sea and therefore has easy access to transport links and a wider range of markets around the world. As a result, Brent is used as a benchmark for the wider oil market; while WTI is used mainly as a benchmark for the American market.
Different benchmarks are used depending on the composition and quality of the oil being traded:
- Light sweet oil flows easily at room temperature and has sulphur levels below 0.5%. Types include WTI and Brent crude
- Heavy sour oil cannot flow easily at room temperature and has sulphur levels above 0.5%. Types include Dubai crude and Omani crude
Benchmarks are important in the oil market because not only do they enable traders to easily track the price of crude, but they also tell a trader where an oil has come from and what its composition is.
This is needed because the eventual use of the oil depends heavily on the field it comes from. As a result, the benchmarks allow oil traders to know what type of oil they are trading and – if trading futures contracts – which type of oil will eventually be delivered.