World oil markets experienced a rarity this week, as the price of the US benchmark contract, West Texas Intermediate, surpassed Europe’s Brent North Sea crude for the first time since 2020.
Analysts point to Russia’s invasion of Ukraine as a key factor but there are others, as outlined below.
Brent v WTI
The Brent North Sea crude contract refers to oil largely extracted from the expanse of water in northern Europe.
Brent is named after a North Sea oil field off the coast of Shetland, a Scottish archipelago.
“Because today Brent also includes West African, Mediterranean and some Southeast Asia crudes, it is considered as a better benchmark for the global crude” than its US equivalent, said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
Brent’s value determines the pricing for two thirds of the world’s oil and is used by OPEC.
West Texas Intermediate (WTI) comes from American oil fields and is mainly used by US consumers.
The United States is the world’s biggest producer and consumer of crude.
WTI fixes the price of oil stored in huge vats found in the small town of Cushing, Oklahoma.
WTI is lighter than Brent but with a higher concentration of Sulphur, meaning the US oil is easier to refine into gasoline.
Why Brent is usually dearer
Prior to 2008, WTI was generally more expensive than Brent. However, a decline in North Sea output combined with a boom in oil extracted from US shale rock saw the contracts switch places.
There has usually been a difference of only a few dollars between the contracts, while pricing is generally influenced by similar factors.
“Brent tends to be slightly more expensive than WTI given that it is a more global benchmark, covering a much wider geography and is a broader indicator of worldwide oil prices,” said Victoria Scholar, head of investment at Interactive Investor.
There are additionally higher transport costs and greater supply risks for Brent.
WTI traded at $112.70 per barrel on Friday, slightly above Brent at $112.55.
Why WTI has overtaken Brent price
“People are snapping up WTI as Russian supplies are not available,” said Michael Lynch at Strategic Energy & Economic Research.
The invasion of Ukraine has shaken also the supply outlook for key producer Russia.
“We’re seeing a big shift in the global oil market right now as a result of Russian sanctions and the decision of Western countries to eventually shun its energy altogether,” noted Craig Erlam, analyst at OANDA trading group.
Cushing stockpiles stand at a three-year low after a drop of 40 percent over the past 12 months.
“We’re seeing Cushing stocks continue to deplete because of higher export demand,” according to Andrew Lebow at Commodity Research Group.
Independent analyst Stephen Innes said WTI had hit “a perfect storm”.
Brent has additionally been hit by weakening demand growth in China in the wake of the country’s renewed Covid lockdowns.
“I think WTI will remain relatively expensive to Brent until the Russian crisis is resolved and the current product shortage that impacts Europe eases,” forecast PVM Energy analyst Tamas Varga.