OIL & GAS

Why WTI dipped below zero last month and why Brent crude futures are the ideal fit for Indian hedgers

Market watchers across the globe were astonished when oil prices fell much below zero and seeing that buyers were paid to buy oil. The world was amazed and bewildered in equal measure at the slide in oil prices, as coronavirus pandemic took a toll on the world economy.

Obviously, we now know that it was a particular grade of oil i.e. WTI crude prices which dropped to $-40/bbl at the New York Mercantile Exchange (NYMEX) and was strictly a problem limited to the United States. On the contrary, two-thirds of all oil traded globally and close to 90 percent of Indian crude imports are benchmarked to Brent crude, the prices of which remained in positive territory.

Difference between WTI and Brent

When it comes to crude oil, there are different grades. The most popular traded grades are Brent North Sea Crude and West Texas Intermediate (WTI). WTI is usually extracted from US oil fields in Texas, Louisiana and North Dakota, and delivered in Oklahoma, while Brent crude is extracted from the North Sea, and delivery locations vary by country.

Both of them have lower Sulphur content, considered “sweet”, and relatively light in density. Cost of shipping for Brent crude is lower, since it is produced near the sea and can be delivered anywhere, while of WTI is higher since it is produced in landlocked areas with limited storage facilities.

Brent is the benchmark price used by Europe and the Organization of Petroleum Exporting Countries (OPEC), while WTI crude price are a benchmark for US oil prices. Most of the oil produced in Europe, Africa and the Middle East is priced according to the cost of Brent crude.

Essentially, Brent is the reference for about two-thirds of the oil traded globally. Since India imports primarily from OPEC countries, Brent is the right benchmark for oil prices in India.

Source
CNBC
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