Why WTI Crude Oil Prices Went Negative While Brent Didn’t Fall Much?
Brent vs WTI Crude Oil? Futures of WTI (West Texas Intermediate), a benchmark for US oil prices, traded in the negative territory for the first time in history on April 20, 2020. It was mainly due to timing of the supply-demand movement disruptions amid COVID-19 pandemic.
Why WTI Prices Went Negative While Brent Didn’t Fall Much? All the parameters on which Brent and WTI differ from each other are explained in detail in this article.
What is the difference between Brent Crude and WTI Crude Oil?
Understanding the Crude
- Crude is a physical commodity that is traded on exchanges or Over-The-Counter (OTC) but delivered at a physical location.
- There are different types of Crudes like – West Texas Intermediate (WTI), Brent Crude, OPEC Reference Basket, Dubai Crude, Oman Crude, Bonny Light, Urals etc.
- All these Crude types differ in terms of quality and price, however, the key difference is the place where they are delivered. For example, WTI is delivered at Cushing in Oaklahoma, while Brent is delivered globally at various ports.
How is Brent Crude Different from WTI Crude Oil?
- Brent Crude is the international benchmark used by the OPEC (Organization of Petroleum Exporting Countries) – Iran, Iraq, Kuwait, Saudi Arabia, Venezuela (5-founder members), Qatar, Indonesia, Libya, UAE, Algeria, Nigeria, Ecuador, Gabon, Angola, Equatorial Guinea and Congo (OPEC: Total 13 member countries).
- Since India imports crude oil primarily from OPEC, Brent is a benchmark for oil prices in India. Most of the oil produced in Europe, Africa and the Middle East is priced according to the cost of Brent crude.
- Brent is the reference for about 2/3rd of the oil traded around the world, making it more sensitive to the Geographical tensions.
- Whereas, WTI Crude is the benchmark for US oil prices. WTI is dependent on the production in the US.
- Both oils are relatively light, but Brent has a slightly lower API gravity than API gravity of WTI. Thus, WTI is slightly lighter than Brent Crude.
- API gravity of Brent = 38.06, while API gravity of WTI = 39.6
- What is API Gravity?
- API Gravity is a commonly used index for measuring the density of a crude oil or refined products. It measures how heavy or light a petroleum liquid is as compared to water.
- API stands for the American Petroleum Institute, which is the industry organization that created this measure.
- A crude oil will typically have an API between 15 and 45 degrees.
- Higher API indicates a lighter (lower density) crude. While, Lower API indicates a heavier or denser crude.
- Generally, lighter (high API) crudes are more valuable because they yield more high-value light products when run through a refinery.
- Light crude is typically in the 35-45 API range, which includes most of the highest valued crudes such as Brent and WTI.
Extraction & Delivery
- West Texas Intermediate (WTI) is extracted from oil fields in the United States. It is primarily extracted in Texas, Louisiana and North Dakota and is then transported via pipeline to Cushing, Oklahoma for delivery. Thus, WTI is delivered at Cushing in Oaklahoma.
- Cushing was a major spot for oil for decades, and has been the delivery spot for contracts and price settlements for WTI for more than 30 years.
- Brent Crude
- Brent crude is extracted from oil fields in the North Sea.
- It is delivered globally at various ports.
- ‘Brent Crude’ refers to a blend of four crude oils – Brent, Forties, Osberg, and Ekofisk which together are known as BFOE.
Shipping & Storage Cost
- Cost of shipping for Brent crude is typically lower, since Brent Brent essentially draws its oil from more than a dozen oil fields located in the North Sea and it can be put on ships immediately. Moreover, since it is close to water and it can be stored in tankers.
- Shipping of WTI is priced higher, since it is produced in landlocked areas where the storage facilities are limited. The landlocked nature of storage, is quite far from the nearest water body. So transportation of WTI crude is an issue amid current lockdown situation of COVID-19 pandemic.
- Brent Future contracts are primarily traded on Intercontinental Exchange (ICE) in London.
- While WTI is the underlying asset for oil futures on the NYMEX (New York Mercantile Exchange).
Why WTI Crude Oil Prices Went into Negative?
- The price of the US home-produced WTI crude oil turned negative on April 20, 2020, for the first time in history. Negative price in crude oil would mean producers paying buyers to take the commodity off their hands.
- Thus, WTI Crude oil future contracts traded in the negative territory for the first time in history. The lower demand due to COVID-19 pandemic has led to oversupply.
- On April 20, 2020, WTI traded 306%, gone as low as -$40.32 and finally, settled at $37.63 per barrel.
- The cost of Brent, which is the International Benchmark, was higher since more storage space is available across multiple locations, making its deliveries easier. On April 20, Brent slipped 9% and settled at $25.57 a barrel.
Why WTI prices Slipped to a Historic Low?
- WTI has future contracts expiring every month just like any other commodities. For WTI, the current month expiry was on April 21.
- And these contracts have to be settled physically. This means the buyer of a futures contract will have to take delivery of physical crude, if he is still holding the contract at expiry.
- This delivery is to be taken at Cushing (Oklahoma), a key storage hub. There are also speculators who have not contracted for storage of the incoming crude. In a usual scenario, they would have easily sold the contract in the market.
- However, considering the current COVID-19 lockdown scenario, there were no buyers for this contract due to sharp fall in oil demand in the US and also globally.
- Following the lockdown in the US, less power usage by people led to the current fall in demand. Given the excess supply of crude oil in the market, prices started falling and storage capacities began running out.
- Refiners do not have enough capacity to the store the crude, airlines and transport is shutdown. The storage at Cushing is nearly full and even transportation through pipeline does not look like a feasible option due to lack of demand.
- Hence, anyone who cannot take the actual delivery will sell it at whatever price they are getting it, even If it is negative.