Did You Know? Key Benchmarks for Worldwide Oil Prices

WTI (West Texas Intermediate) and Brent Crude are the key benchmarks for worldwide oil prices, much like the S&P 500 and Russell 1000 indices are key benchmarks for the prices of U.S. stocks.

The contracts tend to be highly correlated to each other, but on occasion their prices diverge ---sometimes significantly. WTI is produced primarily in the Texas and Oklahoma area. Brent comes from several oil fields in the North Sea. Given that WTI is “landlocked” in Texas, transport costs are generally greater. Brent is produced at sea and thus easily loaded onto tankers for transport to its final destination.

Both WTI and Brent are considered to be “light, sweet” crude products. The lightness of an oil product refers to its density as measured by its American Petroleum Institute gravity reading. Most API gravity ratings are between 10 and 70. The higher the API number. the lighter the oil. Lighter grades of crude are easier and less costly to refine. WTI has an API gravity number of just under 40. Brent’s API number is approximately 38, still light but not as light as WTI.

The “sweet” designation has to do with sulfur content. The lower the sulfur content, the sweeter the crude oil. Higher sulfur content is considered “sour” and is more difficult to refine. WTI has a sulfur content of 0.24%, making it very sweet, while Brent has a much higher sulfur content of 0.40% - much higher than WTI, but still below the threshold (0.5%) that would classify it as a sour crude.

Hence, any crude classified as light sweet has two attributes that make it easier to refine into products such as gasoline and other distillates.

Energy traders watch both benchmarks closely, as oil is such an important part of the world economy. They also watch the spread between the two benchmarks and often will trade the spread when the two prices diverge by too much.