The two major benchmarks in oil trading globally are Brent crude, and WTI crude oil. This guide will outline the nature of each benchmark, the factors that influence the prices and how each one of them is different. This overview can be used by traders who explore the energy markets to know more about brent vs WTI crude oil.
What to know about brent crude and WTI crude oil
What is brent crude oil
The North Sea oil fields give birth to most of the crude oil that has been used, particularly in the form of Brent crude oil. It is also a major market leader in setting oil prices in Europe and Africa and in selected Asia. It is one of the most cited oil prices in the world, owing to its broad usage.
What affects the price of brent crude oil
The price of the Brent crude oil is sensitive to changes in the world supply, demand and geopolitical stability. The decisions of major exporting countries on production have a vast effect on final prices. There are also wider economic factors in importing areas that influence the levels of demand. The Brent crude price depends on many factors:
- Global supply levels: The amount of production of large exporting countries has a direct impact on the amount of world supply.
- Geopolitical stability: The conflicts along the areas of production or transit are likely to bring down supply and increase costs.
- Currency movement: As oil is traded in US dollars, the strength of currencies influences prices in different parts of the world.
How to trade brent crude oil
The process of trading Brent crude oil normally entails a choice of a number of financial instruments. All options include varying degrees of exposure, cost, and complexity. Knowing these options assists traders to choose an appropriate strategy. Typical methods of trading Brent crude oil are:
- Exchange-traded funds: The funds monitor the change of the Brent price without having to take futures contracts.
- Energy stocks: Shares of oil companies tend to resort to the general movements of Brent prices.
- Contracts-for-difference: These instruments enable one to speculate on the movement of the Brent price but without the ownership of oil.
What is west texas intermediate crude oil
West Texas Intermediate (WTI) is a light, sweet crude oil (primarily the United States). It forms the basis of the main pricing in the North American oil markets. Due to its quality, it is a preferred reference point in terms of pricing in the region.
What affects the price of WTI crude oil
The WTI crude price is sensitive to the domestic output and inventory. Stockpile reports provided weekly usually indicate changes in the equilibrium of demand and supply. The same with wider economic activity throughout the United States; the general demand is also impacted upon. The WTI pricing is sensitive to the following:
- Domestic production: The level of United States production has a direct impact on the level of WTI supply and pricing pressure.
- Inventory reports: Weekly stockpile reports tend to indicate a change of balance between supply and demand.
- Economic activity: Faster domestic economic growth will generally boost oil demand in the transport and the industry.
How to trade WTI crude oil
WTI crude oil trading structure is similar to the time the Brent crude oil is trading. With a number of financial tools, one can take on exposure without the need of owning physical oil. Primarily, the choice of the appropriate instrument is based on personal interests of trading achievements and the degree of risk. Some of the most common WTI crude oil trades are:
- Exchange-traded funds: These are the funds that follow the price movement of WTI, but provide exposure without futures contracts.
- Energy stocks: The shares of energy firms of the United States tend to move with the overall pattern of WTI.
- Contracts-for-difference: Working as instruments to speculate on the price movement of WTI, without owning underlying oil.
Conclusion
Brent crude and WTI crude oil are both crucial oil benchmarks in the global economy possessing their unique attributes. Knowing the differences in their origin, quality and prices helps to interpret the markets better. It is still essential to do careful research before trading either of these benchmarks.
