Oil markets witnessed a historic moment on Monday when WTI crude for May delivery fell more than 100 percent, settling at around -$37/bbl indicating that producers would have to pay traders to take oil off them.

Difference between Brent and WTI Crude

WTI or Western Texas Intermediate is extracted from oil fields in the United States. It is primarily extracted in Texas, Louisiana and North Dakota and is then transported via pipeline to Cushing, Oklahoma for delivery. Cushing was a major spot for oil for decades, and has been the delivery spot for contracts and price settlements for WTI for more than 30 years. It contains 0.24% of sulfur. WTI futures contracts are traded on the New York Mercantile Exchange (NYMEX)

Brent crude is extracted from oil fields in the North Sea. ‘Brent Crude’ refers to a blend of four crude oils - Brent, Forties, Osberg, and Ekofisk which together are known as BFOE. It contains 0.37% of sulfur. Brent futures contracts are traded on the Intercontinental Exchange (ICE) in London.

Why did WTI futures fall so much?

Just like any other commodities, WTI has future contracts expiring every month. For WTI, the current month expiry was on April 21. Also, remember these contracts have to be settled physically.

This means the buyer of a futures contract will have to take delivery of physical crude, if he is still holding the contract at expiry. This delivery is to be taken at Cushing. There are also speculators who have not contracted for storage of the incoming crude. In a usual scenario, they would have easily sold the contract in the market.

However, considering the times we are in, there were no buyers for this contract due to sharp fall in oil demand in the US and also globally. Refiners do not have enough capacity to the store the crude, airlines and transport is shut. The storage at Cushing is nearly full and even transportation through pipeline does not look like a feasible option due to lack of demand. Hence, anyone who cannot take the actual delivery will sell it at whatever price they are getting it, even If it is negative.

Why does Brent not fall so much?

Brent futures expire on April 30. The sell off seen in WTI is not happening in Brent simply because Brent crude contracts settle in cash. Thus, any speculator can take them to their expiry without being forced to sell at any price, a “luxury” not available in WTI crude futures. Another reason is that Brent Brent essentially draws its oil from more than a dozen oil fields located in the North Sea. It is close to water and hence can be stored in tankers, while WTI, because of its landlocked nature, is quite far from the nearest water body. So transportation of WTI crude is an issue, more so in these times.

Why is Brent preferred over WTI?

WTI usually trades at discount to brent. WTI is the benchmark for oil prices in the US, while the rest of the world - and nearly two-thirds of all oil contracts traded - are on Brent. This makes Brent the global benchmark. The preference for Brent crude today stems from the fact that it may be a better indicator of global oil prices.

First Published:Apr 21, 2020 9:56 AM IST