Global oil markets have seen a scarcity this week, with the price of the US benchmark contract, West Texas Intermediate, overtaking European 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 listed below.
Brent vs. WTI
The North Sea Brent crude contract refers to oil extracted largely from the northern European water body.
Brent is named after an oil field in the North Sea off Shetland, a Scottish archipelago.
“Because today Brent also includes West African, Mediterranean and some Southeast Asian crudes, it is considered a better benchmark for global crude” than its US equivalent, said Ipek Ozkardeskaya. , senior analyst at Swissquote Bank.
The value of Brent determines the price of two-thirds of world oil and is used by OPEC.
West Texas Intermediate (WTI) comes from US oil fields and is used primarily by US consumers.
The United States is the world’s largest producer and consumer of crude oil.
WTI sets the price for oil stored in huge vats found in the small town of Cushing, Oklahoma.
WTI is lighter than Brent but with a higher concentration of sulfur, which means US oil is easier to refine into gasoline.
Why Brent is generally more expensive
Prior to 2008, WTI was generally more expensive than Brent. However, a drop in production in the North Sea combined with a boom in oil extracted from US shale rock has seen contracts change places.
There has usually been a difference of only a few dollars between contracts, while prices are usually 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 a broader indicator of global oil prices,” said Victoria Scholar , Head of Investments at Interactive Investor.
There are also higher transportation costs and higher supply risks for Brent.
WTI was trading at $112.70 a barrel on Friday, slightly above Brent at $112.55.
Why WTI has surpassed the price of Brent
“People are buying WTI because Russian supplies are not available,” said Michael Lynch of Strategic Energy & Economic Research.
The invasion of Ukraine has also shaken the supply prospects of the main Russian producer.
“We are currently seeing a big shift in the global oil market as a result of Russian sanctions and the decision by Western countries to finally steer clear of its energy altogether,” noted Craig Erlam, an analyst at OANDA trading group.
Cushing’s stocks are at their lowest level in three years after falling 40% in the past 12 months.
“We are seeing Cushing’s inventory continue to deplete due to higher export demand,” according to Andrew Lebow of Commodity Research Group.
Independent analyst Stephen Innes said WTI hit “a perfect storm”.
Brent was also hit by weakening demand growth in China following further Covid shutdowns in the country.
“I think WTI will remain relatively expensive for Brent until the Russian crisis is resolved and the current product shortage affecting Europe eases,” said Tamas Varga, analyst at PVM Energy.
