What is West Texas Intermediate (WTI)?

West Texas Intermediate (WTI) is a crude oil benchmark used in oil pricing. It is a grade of crude oil referred to as light sweet crude oil because of its low density and low sulfur content (0.24%). The WTI is one of the three oil pricing benchmarks including Brent Crude and Dubai Crude. It is also the underlying commodity of the New York Mercantile Exchange’s (NYMEX) oil futures contract. The WTI grade of crude oil is considered a high-quality oil that is easy to refine.

WTI is the official oil benchmark for North America, although, it is sourced from the Permian Basin in the United States. While the oil itself comes from Texas and refined in the Midwest and Gulf of Mexico. It has its main delivery and price settlement point located at Cushing, Oklahoma.

Cushing is a major crude oil trading hub and has served as the delivery point for many crude contracts. Though the town of Cushing is a remote place with 7,826 inhabitants (according to the 2010 census), it is the official site of the Cushing Oil Field. Since its discovery in 1912, it has dominated the US oil production for several years, and it has become a “vital transshipment point with many intersecting pipelines, storage facilities, and easy access to refiners and suppliers.”

Just like other sectors of the economy, the overall purpose of benchmarks in the oil sector is to provide crude oil buyers and sellers with a reference price. By comparing or referencing benchmark prices, oil traders will be able to determine the global range of oil prices. Oil benchmarks are often quoted in the media as the ‘price of oil’. Though Brent Crude and WTI are both oil benchmarks in the US, their prices differ oftentimes, however, oil traders and experts can still work around this. The price difference between Brent and WTI is called the Brent-WTI spread.

WTI has a good grade of oil and a popular benchmark in the US, however, Brent is commonly used as a global benchmark over WTI. About two-thirds of global oil contracts use Brent as benchmark. This doesn’t mean that WTI is not considered as an important benchmark in the world.

Historically, WTI as a benchmark has traded closely to Brent and the OPEC basket, however, in recent times it trades at a discount to Brent. The major advantage Brent has over WTI is international market coverage. Theoretically, WTI should trade higher than Brent, considering its fine quality. However, the opposite has been the case, as both benchmarks trade at two different price points. Since the demand for each differs, it affects the price in each market fundamentals.