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West Texas Intermediate (WTI) can refer to a grade or a mix of crude oil, and/or the spot price, the futures price, or the assessed price for that oil; colloquially WTI usually refers to the price of the New York Mercantile Exchange (NYMEX) WTI Crude Oil futures contract or the contract itself. The WTI oil grade is also known as Texas light sweet, although oil produced from any location can be considered WTI if the oil meets required qualifications.[1] Spot and futures prices of WTI are used as a benchmark in oil pricing. This grade is described as light crude oil because of its relatively low density, and sweet because of its low sulfur content.

The price of WTI is often included in news reports on oil prices, alongside the price of Brent crude from the North Sea. Other important oil markers include the Dubai crude, Oman crude, Urals oil, and the OPEC reference basket. WTI is lighter and sweeter, containing less sulfur than Brent, and considerably lighter and sweeter than Dubai or Oman.[2]

WTI crude oil as a trade grade

Unlike Brent Crude, WTI crude oil is not associated with any particular crude oil produced from any specific oil fields. Rather, WTI crude oil can be described as "light sweet oil traded and delivered at Cushing, Oklahoma" (with WTI Midland and WTI Houston crude oil defined similarly for Midland, Texas, and Houston, Texas respectively). Historically, local trade between oilfield production and refineries around Midland, Texas and Cushing, Oklahoma could be said to define WTI crude oil, but as local production declined, pipelines into those areas began to deliver other crude oil grades produced and blended elsewhere, which were also accepted as WTI crude oil.[3] The WTI crude oil futures contract formalized this relationship by specifying the deliverable asset for the contract could be blend of crude oil, as long as they are of acceptable lightness and sweetness.[4] Crude oil lightness is characterized by oil gravity, and crude oil sweetness is characterized by Sulfur content. Measurements of lightness and sweetness of WTI changes depending on the particular light and sweet oil traded at Cushing at the time of the measurement, and even the particular measurement methodology.

The Platts and Argus API and Sulfur measurements are descriptions of WTI as assessed, while the NYMEX WTI futures contract characterization is a requirement for WTI crude oil delivery to the contract. WTI crude oil will typically satisfy the WTI futures contract requirements and be close to the Platts and Argus assessed values at the time.[8][9][10]

Development of the physical WTI market

The US governmental decontrol of oil prices on January 28, 1981 marked the beginning of the physical WTI Crude Oil spot market. Under the previous US Emergency Petroleum Allocation Act of 1973, WTI crude oil traded under a variety of spot prices split into various categories set by the price controls. After the price decontrol, WTI graded crude oil traded under spot prices centered around spot prices at Cushing, Oklahoma, Midland, Texas, and Houston, Texas (specifically at the Magellan East Houston "MEH" Terminal).[11][12] Oil price collapses during 1985-1986 significantly reduced local oil production around Cushing, and linked Gulf Coast imported crude oil supplies into the Cushing region and the WTI market. The growth of the WTI spot market came in tandem with the growth of the WTI futures market. The volatility of WTI spot prices lead to the development of WTI futures contracts[13], while the adoption of the WTI futures contracts as hedging tools by producers and refiners worldwide lead to the worldwide adoption of assessed physical WTI spot prices as benchmark prices for crude.[14]

Global adoption of WTI assessed prices as oil benchmark prices

The US governmental decontrol of oil prices on January 28, 1981 marked the beginning of the physical WTI Crude Oil spot market. Under the previous US Emergency Petroleum Allocation Act of 1973, WTI crude oil traded under a variety of spot prices split into various categories set by the price controls. After the price decontrol, WTI graded crude oil traded under spot prices centered around sp

The US governmental decontrol of oil prices on January 28, 1981 marked the beginning of the physical WTI Crude Oil spot market. Under the previous US Emergency Petroleum Allocation Act of 1973, WTI crude oil traded under a variety of spot prices split into various categories set by the price controls. After the price decontrol, WTI graded crude oil traded under spot prices centered around spot prices at Cushing, Oklahoma, Midland, Texas, and Houston, Texas (specifically at the Magellan East Houston "MEH" Terminal).[11][12] Oil price collapses during 1985-1986 significantly reduced local oil production around Cushing, and linked Gulf Coast imported crude oil supplies into the Cushing region and the WTI market. The growth of the WTI spot market came in tandem with the growth of the WTI futures market. The volatility of WTI spot prices lead to the development of WTI futures contracts[13], while the adoption of the WTI futures contracts as hedging tools by producers and refiners worldwide lead to the worldwide adoption of assessed physical WTI spot prices as benchmark prices for crude.[14]

Global adoption of WTI assessed prices as oil benchmark prices

The volatility of crude oil prices after the US oil price decontrol led to

The volatility of crude oil prices after the US oil price decontrol led to the development of the NYMEX WTI Light Sweet Crude Oil futures contract in 1983.[20] The NYMEX Crude Oil contract trades under the symbol CL on the New York Mercantile Exchange, now part of Chicago Mercantile Exchange.[21] The contract is for 1,000 US barrels, or 42,000 US gallons, of WTI crude oil, the minimum tick size of the contract is $0.01 per barrel ($10 for contract), and the contract price is quoted in US dollars.[22] Monthly contracts are available for the current year, the following 10 calendar years, and 2 additional months. For example, from the perspective of any day in June before the last trade date for the June 2020 contracts, contracts for June 2020, July 2020, August 2020, ... December 2030, January 2031, and February 2031 are available for trading. The maximum number of contracts would be 134 contracts, which occurs at the expiry of a December contract when contracts for a new calendar year and two months are made available for trading.[23]

Futures contract delivery

Cushing, Oklahoma is a major trading hub for crude oil and has been the delivery point for crude contracts and therefore the price settlement point for West Texas Intermediate on the New York Mercantile Exchange for over three decades.[24] The town of Cushing, Oklahoma is a small, remote place with only 7,826 inhabitants (according to the 2010 Census).[25] However, it is the site of the Cushing Oil Field, which was discovered in 1912, and dominated U.S. oil production for several years. The area became a "vital transhipment point with many intersecting pipelines, storage facilities, and easy access to refiners and suppliers," infrastructure which remained after the Cushing field had declined in importance. Crude oil flows "inbound to Cushing from all directions and outbound through dozens of pipelines".[26] It is in Payne County, Oklahoma, United States.

Adoption of WTI futures for investment purposes

In February 2011, WTI was trading around $85/barrel while Brent was at $103/barrel. The reason most cited for this difference was that Cushing had reached capacity due to a surplus of oil in the interior of North America. At the same time, Brent moved up in reaction to civil unrest in Egypt

In February 2011, WTI was trading around $85/barrel while Brent was at $103/barrel. The reason most cited for this difference was that Cushing had reached capacity due to a surplus of oil in the interior of North America. At the same time, Brent moved up in reaction to civil unrest in Egypt and across the Middle East. Since WTI-priced stockpiles at Cushing could not easily be transported to the Gulf Coast, WTI crude was unable to be arbitraged in bringing the two prices back to parity. Oil prices at coastal areas of the United States were closer to Brent than to WTI. In June 2012, the Seaway Pipeline, which had been transporting oil from the Gulf Coast to Cushing, reversed its flow direction, to transport WTI-priced crude to the Gulf Coast, where it received Brent prices. The price difference persisted, however, and was large enough that some oil producers in North Dakota put their oil on tanker cars, and shipped it by rail to the Gulf and East Coast, where it received Brent prices.[45] Brent continued to trade $10–20 higher than WTI for two years, until June 2013.[46]

Freight rate factorsTo the extent that price difference between WTI and Brent crude entice traders to ship WTI to North Sea refineries or ship Brent to US Gulf Cost refineries, the premium/discount between WTI and Brent crude must reflect oil tanker freight costs. Oil tanker freight cost rates could be highly volatile, due to circular dependence on fuel oil prices and ultimately crude prices, to demand for oil tankers to serve non-USGC non-North-Sea trade routes (especially to China), and to demand for using oil tankers as floating storage for crude oil. From 2000 to 2009, oil tanker freight rates represented a substantial contributor to the WTI premium over Brent crude.[47]

Brent crude production and trading factors