What is WTI?
21 June 2023
Crude oil is a highly sought-after commodity that affects many parts of our lives and powers the world economy. This article explores WTI (Western Texas Intermediate) crude oil, a significant benchmark in the oil market. We will discuss its significance, traits, justifications for being considered a benchmark, trading strategies, potential investment opportunities, and more. You will understand WTI crude oil as a financial instrument.
"WTI" refers to a particular grade of crude oil extracted in the United States, particularly from the Permian Basin in central Texas. Texas light sweet crude is another name for it.
It is an international oil benchmark along with Brent Crude and Dubai/Oman Crude. It is the underlying instrument for the WTI futures contracts traded on the New York Mercantile Exchange (NYMEX). The contract is only settled via physical delivery.
WTI crude oil has critical qualities that make it appealing on the market. It is considered sweet and light as it has a sulfur concentration of between 0.24% and 0.34% and an API gravity of 39.6. These features make WTI simple to refine.
WTI crude extracted in Texas is sent to refineries and oil reservoirs in the Midwest and the Gulf of Mexico through pipelines. WTI is of higher quality than Brent. However, being landlocked and demand and supply dynamics make Brent the favorite benchmark settling about two-thirds of all contracts.
WTI's price is lower than Brent Crude, which is produced in the North Sea. Because it is a landlocked commodity, there are limitations to WTI transport, but also because of other reasons like better productivity.
The Origins of WTI
The name "West Texas Intermediate" is derived from the enormous volume of crude oil kept in huge reservoirs and pipeline complexes in Cushing, Oklahoma. Texas now has the largest oil storage capacity in the country thanks to this complex, which houses 16 storage terminals and 35 pipelines (20 inbound and 15 outbound). The specific grade of crude oil may be called West Texas Intermediate, or WTI because Texas is located south of Oklahoma.
Development of the Physical WTI Market
On January 28, 1981, the US government deregulated oil pricing, resulting in the emergence of the physical WTI crude oil spot market. It used to trade at spot prices that were classed and governed by oil price regulations.
Spot prices for WTI were first launched on the physical market, centered in major cities like Cushing, Oklahoma; Midland, Texas; and Houston, Texas. However, futures markets became more prevalent as the price of crude oil plummeted in 1985–1986.
Why is WTI a Key Oil Benchmark?
While Brent dominates global crude oil prices, WTI is a significant oil benchmark, particularly in North America. Here are the key reasons behind WTI's status as an oil benchmark:
WTI stands out for its superior quality with low sulfur content and lighter density, making it a preferred choice for refiners. Its ease of refinement and suitability for gasoline contribute to its popularity, despite being priced lower than Brent.
The shale boom in the United States during the early 2000s caused an increase in WTI production. This surge in supply caused a considerable drop in WTI crude prices, making it competitive in the market.
WTI Index Based on Physical Trade
WTI futures contracts, traded in quantities of 1,000 US barrels or 42,000 US gallons, rely on actual physical trades. This transparency in trading contributes to WTI's status as a benchmark.
Despite being considered "landlocked" due to the distance between extraction fields and ports, the US has established trade relations with several countries to export WTI oil. Mexico, Canada, and China are significant destination countries for WTI exports.
Understanding WTI Futures
In 1983, New York Mercantile Exchange (NYMEX) established WTI light sweet crude oil futures contracts with Cushing, Oklahoma- the delivery point for price settlement and physical exchange. This was done in reaction to the volatility of oil prices. WTI futures allow market players to purchase oil at a predetermined price in preparation for future delivery and monetary settlement.
The 1,000 US barrels or 42,000 US gallon NYMEX crude oil contract is identified by the symbol "CL" and has a minimum tick size of $0.01 per barrel or $1 per contract. US dollars are used to quote prices. The broader use of an assessed WTI physical spot price indicates the transparency futures contracts give.
WTI's Negative Price in May 2020
The May 2020 futures contracts fell to a record-low WTI price of negative $37.63 a barrel (Buyers were paid to take delivery). This was due to a quick sell-off from traders unwilling to take physical delivery due to a lack of storage capacities.
This event led to Brent crude being established as a prominent benchmark as it better reflected the oil market.
The WTI Spot Market's Importance
The spot market is based on the WTI price today. It considers immediate delivery of WTI oil. It serves as a significant benchmark for pricing American crude oil. Its spot price is affected by supply and demand, production and shipping costs, and market mood.
WTI-based CFD Trading
Contracts for Difference (CFDs) based on WTI offer an attractive alternative. With CFDs, investors speculate on the price movement of WTI without directly buying or selling the crude oil itself. Our symbol for WTI CFD is USOIL.
By understanding and predicting WTI oil price movements, investors can gain from upward and downward price trends. Although there are risks involved if the market moves in the opposite direction.
Why is Reliable Market Data Critical?
Considering WTI oil price driving factors, you must back your CFD trading verdicts with a thorough market analysis. Therefore, a reliable market data source for an unbiased view of the CFD market is critical.
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