Two major financial crude oil benchmarks are traded worldwide. West Texas Intermediate (WTI) contracts, which are traded on the Chicago Mercantile Exchange (CME), are landlocked futures contracts that serve as the benchmark for North America. Brent Oil contracts are traded on the Intercontinental Exchange (ICE) and are North Sea futures contracts, considered the benchmark for all of Europe and most of Africa. In some cases, Brent oil futures are used as Asian benchmarks as well. WTI crude oil and Brent oil are the major financial benchmarks used to price and hedge crude oil throughout the globe. In addition, financial contracts, over-the-counter swaps, and options use WTI and Brent as benchmarks.
The supply and demand balances are consistently calculated to find the future movements of the underlying product. While WTI and Brent oil are traded in different locations, they generally are highly correlated and move in tandem.
Can You Exchange Brent for WTI?
Brent oil and WTI are fungible. This scenario means that oil in the United Kingdom, where Brent oil is extracted, can be brought to the United States in exchange for WTI crude oil. Both Brent and WTI are light-sweet varieties of crude oil. When crude oil is defined as sweet, it does not have a lot of sulfur. It does not need to go through a pre-processing scenario before refining it into usable products like gasoline or jet fuel. Conversely, sour crude oils are not as attractive, as it takes time to process them before refining them to make functional consumer products.
A heavy crude oil does not flow well under normal conditions. This is because the gravity of the crude oil is elevated. Light crude oil can be sent to a refiner via a pipeline as it flows easily, while many heavy crude oils will not flow. Heavy crude oils need to be pre-treated before they can be used in the refining process to make products like diesel fuel and gasoline.
How Can You Invest in Crude Oil?
There are several ways to begin crude oil investing, including financial instruments that track crude oil price movements. While there are some commodities like gold and silver by which you can purchase coins or bullion and store them in a vault, crude oil is more difficult to store, and you will need sufficient capital to purchase a crude oil storage unit if you decide to buy physical oil.
There are several ways to trade financial products that track the movement of WTI and Brent oil. The most common instruments are exchange-traded futures contracts, contracts for differences (CFDs), and exchange-traded funds (ETFs) that hold futures contracts.
What is a Futures Contract?
A futures contract is the obligation to purchase an underlying asset on a specific date. The most popular crude oil futures contracts are the WTI futures contract and the Brent futures contract. The WTI futures contract is traded in 1,000 barrel increments and is physically delivered in Cushing, Oklahoma. The Chicago Mercantile Exchange (CME) offers a financially delivered WTI futures contract. A physically delivered contract means that, if you take the contract into the delivery period, you are obligated to take or make the delivery of 1,000 barrels of WTI crude oil at a storage facility that the CME recognizes.
The intercontinental exchange Brent Oil futures contract is both a physically delivered and financially delivered futures contract. A financially delivered contract means you are responsible for paying the difference between the purchase price and the selling price of the futures contract.
Futures contracts also provide investors with leverage. You can use a margin account to post a portion of the value of the futures contract to control more assets. Your futures broker will require that you post collateral in a margin account in order to trade futures contracts using leverage.
What is an Oil CFD?
A contract for difference is another financial tool that can be used to track crude oil movements. There are CFDs available for both WTI crude oil and Brent crude oil. A CFD can be bought and sold via a CFD broker. You are responsible for the difference between the purchase and selling prices when you trade a CFD. Similar to futures contracts, you will need to open a margin account to trade CFDs. CFD brokers also offer leverage, allowing clients to magnify their investing power using a relatively small amount of capital. Leverage, however, cuts both ways and can enhance losses as well, so it must be used with knowledge and understanding.
What is an ETF?
An exchange-traded fund (ETF) is a financial contract that generally tracks the movement of other assets. Often an exchange-traded fund will hold futures contracts, and the movements will occur in tandem with these financial assets. For example, the United States Oil Fund (USO) is an ETF that tracks the movements of WTI oil futures, and its holding generally consists of WTI oil futures contracts. The United States Brent Oil Fund is an ETF that holds Brent oil futures contracts and tracks the movements of ICE Brent futures.
Why Do the Prices of WTI and Brent Change?
Oil price movements are based on fundamental and technical analysis. The fundamentals of oil include supply and demand. Inventory levels in the United States are posted on the Energy Information Administration website weekly. Traders often use technical analysis to determine future oil price movements. Technical analysis is the study of past price movements. Traders use momentum, trend following, and support and resistance levels to gauge future price of WTI and Brent crude oil.
The Bottom Line
WTI and Brent crude oil are the North American/European/African benchmarks. They trade physically around the globe as well as in the form of futures contracts. Futures contracts are both physically and financially settled. The most popular financial instruments are future contracts, CFDs, and ETFs. WTI and Brent crude oil are both light sweet crude oil which means they are attractive to refiners planning to use the oil to create gasoline and diesel fuel. Traders often use both fundamental and technical analysis to track the futures movements of WTI and Brent crude oil.