West Texas Intermediate
West Texas Intermediate (WTI) is a grade of crude oil produced primarily in the United States and widely used as a benchmark for crude-oil prices. WTI is commonly associated with the West Texas region and is traded in major financial and physical energy markets.
WTI is characterized by relatively low density and low sulfur content. It is therefore generally classified as a light, sweet crude oil.
Characteristics
WTI is commonly described according to two principal characteristics:
- light — indicating relatively low density;
- sweet — indicating relatively low sulfur content.
These characteristics generally make WTI suitable for producing a relatively high proportion of valuable refined petroleum products.
Pricing benchmark
WTI is one of the major international crude-oil price benchmarks.
Its price is widely used as a reference for:
- crude-oil transactions;
- energy contracts;
- futures and options;
- financial derivatives;
- investment analysis;
- economic analysis.
Other major crude-oil benchmarks include Brent crude and Dubai crude.
WTI futures
WTI crude-oil futures are traded on the New York Mercantile Exchange (NYMEX), part of CME Group.
The contracts provide a standardized mechanism for market participants to obtain exposure to movements in WTI crude-oil prices.
Market participants may use WTI futures for:
- hedging;
- speculation;
- price discovery;
- risk management.
Price formation
The market price of WTI is influenced by supply and demand conditions in the crude-oil market.
Factors that can affect WTI prices include:
- crude-oil production;
- refinery demand;
- inventory levels;
- transportation capacity;
- geopolitical events;
- economic growth;
- changes in global oil demand;
- expectations about future supply and demand.
WTI and Brent
WTI and Brent crude are two of the most widely followed crude-oil benchmarks.
WTI is primarily associated with the United States and is physically linked to crude-oil delivery infrastructure centered on Cushing, Oklahoma.
Brent is associated with crude oils produced in the North Sea and is widely used as an international benchmark.
The difference between the prices of the two benchmarks is commonly referred to as the Brent-WTI spread.
A simplified representation is:
The spread can change according to regional supply and demand conditions, transportation constraints, crude quality, inventories, and other market factors.
Cushing, Oklahoma
Cushing, Oklahoma is a major crude-oil storage and pipeline hub and is the designated delivery location for WTI futures contracts traded on NYMEX.
Because of its role in the physical delivery system, inventories at Cushing can influence the relationship between WTI futures prices and physical crude-oil markets.
WTI and OPEC
The Organization of the Petroleum Exporting Countries (OPEC) influences global crude-oil markets through its members' production policies.
Changes in OPEC production can affect global oil supply and therefore influence the prices of major crude-oil benchmarks, including WTI.
WTI itself is not an OPEC-controlled benchmark because it represents crude oil associated primarily with the United States.
WTI and the United States
WTI has particular importance in the United States because it is closely connected to domestic crude-oil production, transportation, storage, refining, and financial markets.
Changes in U.S. oil production and inventories can therefore have a significant effect on WTI pricing.
Negative WTI price in 2020
In April 2020, the price of the front-month WTI crude-oil futures contract briefly fell below zero.
The event occurred during the COVID-19 pandemic, when a sharp reduction in oil demand coincided with high inventories and limited available storage capacity.
The contract ultimately settled at a negative price on 20 April 2020.
The episode demonstrated the importance of physical storage and delivery conditions in commodity futures markets.
Importance
WTI is an important benchmark for crude-oil pricing and a major reference point for energy markets. Its price is influenced by physical oil-market conditions, inventories, transportation infrastructure, production, refinery demand, and expectations concerning future supply and demand. WTI prices are also widely used in financial markets for hedging, investment, and economic analysis.