Oil: WTI, Brent & the battle for world dominance
How Brent oil became king of the world
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The fallout from the coronavirus sent oil investors on a roller-coaster ride in April and May of 2020 like never before. As air and auto travel came to a crashing halt, demand dropped like a stone, and prices followed.
The benchmarks, West Texas Intermediate and Brent Crude plunged, sending WTI into negative territory for the first time ever.
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However, as May closed out, prices registered a historic rebound, with WTI jumping over 88 percent to $35.49 per barrel, the biggest leap ever. Brent rallied nearly 40 percent to $35.33, the largest percentage gain since March of 1999, as tracked by Dow Jones Market Data Group.
But what’s the difference between the two, and what do their movements mean?
"Their stories reflect not only the price of oil but the story of how the global economy has developed and changed over recent decades" Phil Flynn, senior energy analyst at The PRICE Futures Group, told FOX Business.
So we asked Flynn, who is also a contributor, for a historical tutorial.
West Texas Intermediate Crude
For years, the West Texas Intermediate crude contract was the only game in town.
| Ticker | Security | Last | Change | Change % |
|---|---|---|---|---|
| USO | UNITED STATES OIL FUND L.P. | 81.65 | +0.12 | +0.15% |
| SCO | PROSHARES TRUST II ULTRASHORT BLOOMBERG CRUDE | 14.94 | -0.04 | -0.27% |
| XLE | ENERGY SELECT SECTOR SPDR ETF | 95.23 | -0.90 | -0.94% |
That was in the earliest days of oil production and conjures up pictures of oil rigs, oil gushers and the birth of wildcatters. Not to mention later icons such as the fictional oil tycoon J.R. Ewing, the lead in the popular television series "Dallas."
Texas and oil were synonymous, and WTI -- the Texas grade of oil -- was the envy of the world. It was light, sweet (few impurities) and easy to refine.
It helped feed America's industrial revolution and the U.S. driving culture. The country became the largest and most significant oil consumer on the face of the earth and the leader of the global economy powered by WTI.
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The prices paid in Texas set the prices for the rest of the world. While the world as a whole consumed oil, the United States did it on a grander scale than anyone: The country was both the world's largest consumer and the world's largest economy.
American oil demand was a reflection of demand across the globe. If U.S. demand was up, so was the world's. If U.S. oil demand sneezed, the rest of the world would catch a cold. The WTI contract captured that, and so the world used it as the benchmark to price oil.
Over the years, Texas oil production began to decline, but U.S. demand continued to rise. The U.S. became more dependent on oil imports to make up the difference. Still, because it was the only game in town, the WTI contact continued to set prices around the world.
Then came a new kid in town, Brent Crude.
Brent Crude Oil
The year was 1976. The place, the North Sea. That's where Brent started to be produced as a sweet blend that helped fill a void in a world that was getting hungrier for oil.
As production of North Sea oil began to decline, other sweet blends were added to the contract from OPEC and Africa but it kept its name. While it fed Europe's ballooning economy, its price was always based on WTI.
| Ticker | Security | Last | Change | Change % |
|---|---|---|---|---|
| BNO | UNITED STS BRENT OIL FD LP UNIT | 33.23 | +0.01 | +0.03% |
| OLEM | n.a. | n.a. | n.a. | n.a. |
| DBE | INVESCO DB MULTI-SECTOR COMM TR ENERGY FD ETF | 21.46 | -0.04 | -0.20% |
Yet as the world moved into the 90s, a sleeping giant emerged: China. For the world’s most populous nation, demand growth for oil was unprecedented.
Brent crude was shipped to China, and because U.S. oil demand growth was smaller and China more dramatic, the Brent contract started to have a more assertive role in setting global oil prices.
In the U.S., the shale revolution of the 21st century further altered the way the WTI contact was viewed.
The U.S. set the stage by importing oil, but as domestic production increased, many barrels were kept at home. Because the U.S. had an oil export ban at the time, a relic from the Arab oil embargo, barrels would pile up.
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Around the globe, though, supplies tightened as China's oil demand continued to rise. The U.S. WTI market, because of the export ban, was growing more out of touch with the overall global market.
In 2012, that caused the Energy Information Administration (EIA) to strip the title of global benchmark from WTI and award it to Brent.
At the time, the EIA said the "change was made to reflect better the price refineries pay for imported light, sweet crude oil and takes into account the divergence of WTI prices from those of globally traded benchmark crudes such as Brent,” according to reports.
Now that the U.S. oil export ban has been lifted, however, and U.S. shale producers have taken a hit due to the coronavirus, that could change. WTI might rise again.
But the way the global economy has grown, two benchmarks may prove better than one. Brent and WTI both set prices and help the users of that commodity to manage risk better -- buoying the U.S. and the global economies alike.
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Phil Flynn is senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com.