The WTI marks 25 years as the barrel benchmark

The Little Giant

In spite of being the benchmark of the oil market in the whole western hemisphere, par excellence, the WTI crude oil is one of the least traded.History of the main international benchmarks.

By Fernando Bastos*

WTI is the benchmark used by the media to present the international price of a crude oil barrel. This international indicator shows the price in dollars per barrel being useful as a reference to all the crude oils traded in the western hemisphere, having a direct impact in the price of all type of crude oils and its refined and petrochemical products all over the world, as well as in the price of the natural gas in North America.

In addition, WTI is a type of light crude oil produced in Texas, United States, containing about 0.45% sulfur weight. This percentage is considered intermediate level compared with sweet crude oils which have less than 0.10% sulfur, and with the sour, with more than 1.5%. Hence its name, West Texas Intermediate.

The WTI market is characterized by a large number of independent producers, from large petroleum companies to common citizens, who sell about 400 thousand barrels of crude oil to gatherers based on posted price in the market, on a daily basis.

The oil is then brought through pipelines and directed towards an oil-trading hub called Cushing, Oklahoma, being pumped toward the north to be processed by the United States refineries located in the central area of the Great Lakes.

This volume is only the 2% of the United States crude oil demand and it goes to the local market, exclusively, having nothing to do with the requirements and changes of the international market. Perhaps its only relationship with the external world is when it turns into a competitor of the imported crude oils that arrive to the United States Gulf Coast and that are processed by the same refineries which buy the WTI. However, this competition is restricted by the capacity of the pipelines that transport such crude oils.

Despite its relative small volume, non-open competition and non-pressure supply-demand that affect the main American crude oils, the WTI has wide repercussion in the international market because it was chosen by the New York Mercantile Exchange (NYMEX), in 1983, as a benchmark for its light sweet futures contracts.

What is it like?

The WTI was chosen by the NYMEX for several reasons. First, it is a very light crude oil (36° API) with a low sulfur percentage allowing it to be processed in any type of refinery, without using high technology units, turning it into a very popular crude.

Second, it is traded in small volumes which are delivered in a pipeline. As a result, a large amount of daily negotiations are produced, thus increasing the liquidity of the quotation.

Third, this crude oil belongs to thousands of owners guaranteeing high price transparency, staying away from the manipulation given when there is one or few owners or traders. Furthermore, the volume of more than a million barrels per day, produced twenty years ago, turned it into a good benchmark.

Currently, and after 25 years, more than 300 million barrels per day are traded in the Nymex, exceeding 3.5 times the world daily crude oil consumption and 750 times the WTI production. This overwhelming quantity of deals makes clear the fact that those who trade oil contracts in the NYMEX are not the same who are producing, refining or trading barrels of WTI physical production. Daily, countless investment funds and speculators meet each other in the NYMEX, looking for the highest profitability to their investment portfolios.

In the wake of the connotation of “commodity” being traded in the NYMEX, WTI becomes the receptor of all the technical, commercial, political and economic events worldwide, reacting, every minute, to the psychological factors, financial pressure and technical influences coming from several forces of the market.

Such is the power of the Nymex light sweet crude oil price to reflect the conditions of the international market that has contracts forward up to nine years, all of them with very high liquidity.

Day-to-day in the Exchange

The NYMEX has two separate sessions, physical and electronic trading. The first one is developed from 9:00 am to 2:30 pm (New York time) and the second one is from 6:00 pm to 5:45 am (New York time) of the following day, from Sunday to Friday.

Consecuently, every day at 3:00 pm, the settlement price of the session is published. It is the result of an arithmetic calculation that is set as an average weighted price of the last two minutes of trading, for each session. This settlement price is broadcasted by the media on a daily basis, and is the one which rules countless crude oil contracts in the western hemisphere.

Both, settlement price and the NYMEX activity are so relevant that the second most important exchange of the world in hydrocarbons trading, the IPE of London, hold on its activity until the NYMEX settlement, which is when London is facing the night.

Brent, the power in the barrel

The Brent crude oil is traded in the International Petroleum Exchange (IPE), based in London. This crude oil comes from the North Sea and is totally exposed to the international market since it is acquired by many European and Eastern United States refineries. Brent and WTI are of similar quality.

Perhaps it is so important because is the benchmark of Middle East and West Africa, which produce almost the third part of the crude oil in the world. Amid these advantages, a great weakness appears: it belongs to quite a few owners.

Under these circumstances, there is an enormous and beneficial reciprocity between both crude oils. The WTI is financially powerful while Brent remains the dominant benchmark for physical crude oil trading. The WTI is limited to the market conditions inside of the United States, whereas the Brent, in the middle of the sea, is open to world requirements.

Thus, the differential between both, WTI and Brent crude oils comes up as a huge analysis and decision-making tool. Through this differential it is possible to discover the moment in which WTI is “disconnected” of the international market that occurs when the crude oil inventories inside the United States are far from the historical levels. When they are very low, the WTI price shoots up, increasing its differential with the Brent. When the opposite occurs, the WTI weakens even reaching prices lower than Brent.

*International Trade Manager
Translator: Rosa Tulia Baquero.

Impact in Colombia All the considerations on the WTI would not be more than a simple academic analysis if it were not for the fact that it has direct impact in the Colombian crude oils and refined products trading, since all of them are sold in the international market with a price differential against the WTI or using formulas which are directly or indirectly related to this benchmark. Such a differential swings daily and depends on conditions of quality, quantity, volume per cargo, distance to the final destination, freights, and supply-demand, of other competing crude oils and products. However, since crude oil is the raw material for all refined products, it is understood that its price is intimately related to the latter. As a result, when the WTI prices build up we should understand that the gasoline, diesel, jet, propane and fuel oil prices will also increase. Besides, we should understand as well that, under normal trading circumstances, the gasoline, diesel and jet price should be higher than the their raw material which price is ruled by the WTI. Otherwise, refineries would be running at a loss.