Brent to Replace WTI as International Benchmark

The position of West Texas Intermediate (WTI) or light, sweet crude, as the international benchmark for assigning per barrel crude oil prices has been degenerating for several years. Currently, it is already certain that Brent crude will replace the U.S. benchmark as the global standard.

The GSCI commodities index of Standard & Poor’s has already increased Brent’s weighting to 22.34%, starting January, and decreased that of WTI to 24.71% from almost 31%. The reason for the change is that more barrels of Brent are available, which implies that it offers more liquidity and chances for trading.

WTI’s problem is that it is locked within the United States, and the assigning of per barrel crude oil prices is finalized in Cushing, Oklahoma, where the availability pipeline transport is limited.

Basically, WTI is not loaded on tankers for sale elsewhere worldwide and, despite the International Energy Agency’s latest projections, significant amounts of the light, sweet crude is unlikely to ever be sold internationally.

In the futures market, the circumstance is more irregular where Brent crude futures prices, traded on London’s ICE, is now greater than the those of WTI, which is traded on the NYMEX. The difference is almost 30,000 contracts daily. The volumes of both exchanges, when put together, is still in favor of WTI; however, Brent is quickly closing the difference based on the data.

Brent has attained its biggest gains in the options market even if it only follows WTI by a significant margin. Delta and Southwest Airlines have both shifted to Brent to protect their exposure to the price of jet fuel.

The Brent-WTI spread is almost $23 per barrel in favor of the former.

That difference, mostly caused by higher oil production in the United States and the lack of means to transport WTI outside the Midwest, is anticipated to settle with the crude price per barrel of WTI increasing to meet that of Brent.

The producers of crude oil will welcome the change, refiners won’t, and drivers in the United States will end up spending more for gasoline. It may take some time for everything to be finalized, but the initial and major step has already been done.