West Texas Intermediate
- West Texas Intermediate (WTI) crude oil is a specific grade of crude oil and one of the main three benchmarks in oil pricing, along with Brent and Dubai Crude.
- WTI is known as a light sweet oil because it contains 0.24% sulfur, making it “sweet,” and has a low density, making it “light.”
- It is the underlying commodity of the New York Mercantile Exchange’s (NYMEX) oil futures contract and is considered a high-quality oil that is easily refined.
- West Texas Intermediate (WTI) is the crude oil that serves as one of the main global oil benchmarks.
- It is sourced primarily from Texas and is one of the highest quality oils in the world, which is easy to refine.
- WTI is the underlying commodity for the NYMEX’s oil futures contract.
- WTI is often compared to Brent crude, which is the oil benchmark for two-thirds of the world’s oil contracts.
West Texas Intermediate (WTI) as an Oil Benchmark
- The significance of a benchmark in the oil market is that benchmarks serve as a reference price for buyers and sellers of crude oil.
- Oil benchmarks are frequently quoted in the media as the price of oil.
- Though Brent crude and WTI crude are the most popular benchmarks, their prices are often contrasted.
- The difference in price between Brent and WTI is called the Brent-WTI spread.
- 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.
- 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.
- WTI has a sulfur content of 0.24%, whereas Brent has a sulfur content of 0.37%.
- The lower the sulfur content of an oil, the easier it is to refine, making it more attractive.
- A sulfur content below 0.5% is considered sweet. WTI is ideal for gasoline whereas Brent is ideal for diesel.
- The oil prices started falling steeply because the May contracts for WTI were due to expire on 21st April 2020 which posed huge challenges for both the oil producers and the consumers (contractors/buyers).
- Producers: They started selling the oil at unbelievably low prices because shutting production would have been costlier to restart when compared to the marginal loss on May sales.
- Consumers: They were facing the problem of storage. There is no space to store the oil even if they decided to buy and take the delivery.
- Accepting the oil delivery, paying for the transportation and storage would have been costlier than the hit on-contract price.
- In the short term, for both the holders of the delivery contract and the oil producers, it was less costly to pay $40 a barrel and get rid of the oil instead of storing it (consumers/buyers) or stopping production (producers). So this led to the negative WTI oil contract prices.
Future of Oil Prices
- It was the WTI price for May in the US markets that went so low. Crude oil prices at other places fell but not too much.
- Prices for June and the coming months are pegged between $20 and $35 a barrel.
- Investment budgets of exploration and production companies are expected to drop because of the low shale oil prices.
- Normally, this should force oil-exporting countries to cut back production and negate the excess supply, restoring balance in the oil markets but the possibility of recent events from happening again cannot be ruled out.
- Eventually, it would be the demand-supply mismatch (adjusted for how much can be stored away) that will decide the fate of oil prices.
Impact on India
- There is no direct impact on India because Indian crude oil basket does not comprise WTI and it only has Brent and oil from some of the Gulf countries. However, the weakness in WTI reflects on the falling prices of Indian basket as well because oil is traded globally and has indirect impacts.
- The lower price can be beneficial for India in two ways:
- For Individuals: If the government passes on the lower prices to consumers, then individual consumption will be boosted whenever the economic recovery starts in India.
- For Governments: If both, central and the state, governments decide to levy higher taxes on oil, it can boost government revenues.
- This blog pertains to UPSC papers on GS 2, International Organisation, Political Science optional paper 2 and Essay Type Question. Also, do check our previous blogs on various topics. Subscribe today so that you don’t miss out on any important topics.
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