The crude oil price has slumped to $55 a barrel. The only problem is that the oil, which is trading at $54.55, is United States' home-produced West Texas Intermediate (WTI), and not the world benchmark Brent.
The crude oil price has slumped to $55 a barrel. The only problem is that the oil, which is trading at $54.55, is United States’ home-produced West Texas Intermediate (WTI), and not the world benchmark Brent. Nearly, two-thirds of world’s oil demand is for Brent, which is low-density sweet crude, extracted from the North Sea.
The price of Brent currently is $63.28, almost $10 higher than WTI. And since the price of India’s basket of crude oil is heavily dependent on the price of Brent, and not at all on WTI, the $55 mark does not help India directly.
According to Petroleum Planning & Analysis Cell, the Indian basket of crude oil is a derived basket comprising of sour grade (Oman & Dubai average) and sweet grade (Brent dated) processed in Indian refineries in the ratio of 74.77 to 25.23.
In September, when Brent was trading at about $80-81, Dubai oil was trading at $84-85. Historically, there is not much price difference between Brent and Dubai crude oil; with WTI, the gap fluctuates frequently.
The difference between Brent, WTI and Dubai/Oman
Brent: Brent is low-density crude oil with low sulphur content (sweet). It is extracted from the North Sea and comprises of Brent Blend, Forties Blend, Oseberg and Ekofisk crudes. Since it is low-density and low-sulphur oil, it is ideal for refining into diesel, petrol and other fuels.
WTI: WTI is crude oil extracted from wells in the US. WTI is also light and sweet but since it is extracted in land-locked areas instead of sea, it becomes difficult from the transportation point of view. The WTI crude oil is sent via pipeline to Cushing, Oklahoma.
Dubai/Oman: Dubai/Oman crude oil is of slightly lower quality, putting it in sour grade. It is a basket of crude oil from Dubai, Oman or Abu Dhabi. The composition of Dubai/Oman and Brent in the Indian basket of crude oil is decided on the processing capacity of oil companies. Dubai/Oman crude oil is popular in the Asian market.
Why there is a price difference between Brent and WTI
Brent prices are heavily influenced by decisions taken by the Organization of the Petroleum Exporting Countries (OPEC). The OPEC basket price consists of 12 grades: Saudi Arabia’s Arab Light, Venezuela’s Merey, Iran’s Iranian Heavy, Algeria’s Saharan Blend, Angola’s Girassol, Iraq’s Basra Light, Kuwait’s Export, Libya’s Es Sider, Nigeria’s Bonny Light, Qatar’s Marine, Murban of UAE, and Ecuador’s Oriente.
OPEC, the oil cartel, can control Brent prices by deciding to increase or decrease oil supplies. While WTI gets influenced by Brent’s trading price, it is still largely dependent on the US production. The reason WTI is trading at almost $10 discount is that oil production in the US is at the boom, while demand for it is yet to keep pace, even as it surpassed Brent by a slight margin in 2017 when OPEC had cut supplies.
The oil output from the US has gone up to 11.6 million barrel per day, making the country the world’s top oil producer leaving Russia and Saudi Arabia behind. Even as countries with high oil demand are looking to switch to US supplies, transportation and oil processing facilities, currently favour Brent over WTI, especially for Asian nations like India.