Brent crude oil vs WTI oil: what are the key differences?
Discover two of the most popular oil benchmarks in the world – Brent crude and West Texas Intermediate. Here, you’ll learn about the differences between them, and find out how to start trading oil.
What is Brent crude oil?
Brent crude oil is a blended oil (a mix of brent, forties, oseberg and ekofisk) drilled from below the North Sea. It is popularly refined into diesel fuel and gasoline. In trading, Brent is one of the benchmarks for oil in the wider market, such as the Middle East, Europe and Africa.
What is WTI oil?
WTI (West Texas Intermediate) oil – US crude with IG – is a blend of several oils drilled and processed in the United States. It is commonly used for gasoline refining. In the trading world, WTI is primarily a benchmark for the US oil market.
|Extraction||North Sea||Texas, Louisiana, North Dakota|
|Pipeline system||To Scotland||To Oklahoma|
|Refinery||Northwest Europe||The Midwest and Gulf of Mexico|
Because Brent is extracted at sea and not on land, there are certain advantages. Large volumes of oil can quickly and safely be transported in underwater pipelines. In the US, however, the production advantage lies in new extraction technologies, such as well stimulation techniques and horizontal drilling.
When oil has a low sulphur content, it is known as ‘sweet’ oil. American Petroleum Institute (API) gravity refers to the density of the oil – measured on a scale from ten to 70. The higher the number, the less dense the oil. Light sweet oils flow more freely at room temperature, making them easier and cheaper to refine.
The political state of oil producing countries has a significant impact on the commodity’s production and price. When it comes to crude oils such as Brent and WTI, traders should keep an eye on the political climate in the Organisation of the Petroleum Exporting Countries (OPEC) regions and the US. A huge political shift in North America, for example, would affect WTI more than Brent crude, and the spread between WTI and Brent would likely widen.
|Intercontinental Exchange (ICE)||New York Mercantile Exchange (NYMEX)|
Oil is traded on exchanges, just like shares, but they are traded in the form of oil benchmarks. This enables traders to quickly identify the quality and drilling location of the oil they are buying and selling.
Though there are some correlations in composition and usage, all crude oils are not priced equally. The difference between the spot price of Brent crude and WTI is called the Brent/WTI spread. Factors related to supply and demand, including production interruptions and geopolitical influences, can widen the spread.
An example of this would be the Arab Spring in 2011, which sparked fears of reduced Brent crude supply. The spot price reached $126.65 in April that year, while WTI was priced at $112.79.
Another example is the 2020 oil price war between Russia and Saudi Arabia, known as the OPEC crash. Brent crude plummeted to $33.36 (down by 24%) and US oil prices tumbled to $27.34 (down by around 34%). Soon after, the coronavirus pandemic sparked an oil storage crisis, which caused US crude to crash from $18.00 a barrel to -$38.00. This was the first time in history that the oil price fell to negative value.
Oil benchmarking and pricing
Oil benchmarks are important because it describes where the commodity comes from, which is an important factor in determining its use. Benchmarks also enable traders and investors to track the price of a specific oil type.
As mentioned earlier in the article, Brent crude is the benchmark used for the wider light oil market – ie Europe, Africa and the Middle East, while WTI is the benchmark for the US light oil market. Other countries often use both Brent and WTI as benchmarks to value their crude oil.
Benchmarks for the heavy sour crude oil market are Dubai crude and Omani crude.
How to trade Brent crude and WTI
There are different ways to trade Brent crude and WTI, depending on your preferences. One of the most common ways to buy and sell oil is via futures, but there are also other ways to get exposure to the commodity.
When you trade oil futures, you agree to trade the oil benchmark (in this case, Brent crude or WTI) at a specific price at a fixed date in the future. This method is preferred by traders with a longer-term view, as positions can be held without paying overnight funding charges. The charge is already included in the spread.
With options, you have the right, but not the obligation, to buy or sell an underlying asset when its price moves beyond a certain limit within a set time period. You can buy and sell options using derivatives. IG offers daily, weekly, monthly and quarterly options, with benefits such as lower spreads, flexible leverage and zero overnight funding.
You can go long or short on the spot price of Brent crude and WTI oil using derivatives, namely CFDs. Derivatives enable you to open a position with a small deposit (margin) and speculate on rising or falling oil prices without ever owning the physical commodity.
When trading futures and options, you’ll also use CFDs.
You can invest directly in oil company shares, such as BP or Royal Dutch Shell, and profit if the share price goes up. Investing also enables you to receive dividends, if the company pays them, and earn shareholder rights. You can also trade shares via CFDs, enabling you to go long or short on underlying prices.
Exchange traded funds (ETFs) are investment instruments that track the performance of a market, such as oil. They enable you to get exposure to a basket of oil stocks in a single trade. Find out which are the popular oil ETFs to watch.
Brent crude vs WTI summed up
- Brent crude oil is popularly used to refine into diesel fuel and gasoline. It’s one of the major benchmarks for oil in the Middle East, Europe and Africa
- WTI (West Texas Intermediate) oil is commonly used for gasoline refining. It’s primarily a benchmark for the US oil market
- Brent crude and WTI differ in terms of where it’s extracted, its composition, how it’s affected by geopolitics, where it’s traded and how it’s priced
- With IG, you can trade oil via futures, options and derivatives, or invest in oil company stocks and oil ETFs
Publication date :
IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.
The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.
Please see important Research Disclaimer.