It’s used for cooking, transportation, and heat. Wars have been fought just to control small portions of it…
That’s right. I’m talking about oil.
Did you know oil is used in gum? It’s part of what makes gum so soft and chewy.
It’s used in lipsticks and dentures, toothpaste, perfume, and contact lenses…
Kinda crazy, huh?
We couldn’t function without it.
That’s why it’s been such a hot commodity for so long.
If you’ve been interested in oil investing for any time at all you’ve probably seen oil prices go up and down…
And you’ve probably noticed that oil seems to have two different prices.
One for WTI, and one for Brent Crude.
You might not think that the slight difference in price means much… But the difference is actually vital, one that every oil investor needs to understand. So, without further ado, let me introduce you to...
While both Brent and WTI are considered a "light and sweet" grade of crude oil, there are many factors that distinguish the two from one another.
The API gravity for Brent is 38.06 while WTI has an API gravity of 39.6. WTI is considered the lighter, sweeter of the two due to its lower sulfur content and API gravity. The biggest difference between the two is where they are harvested.
Brent essentially draws its oil from more than a dozen oil fields located in the North Sea whereas WTI is restricted to the lands of Texas. For years WTI has been considered the global benchmark of oil prices, until recently.
The town of Cushing, Oklahoma is tiny, and if not for oil, would be unknown. But in 1912, oil was discovered and the Cushing Oil Field roared into existence. The field is only 10 miles by 3 miles, but in 1915, just three years after its discovery, it was producing more than two-thirds of oil in the Western Hemisphere.
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.
Western Texas Intermediate had a good run while it lasted, but now that ride is over.
If we're going to be honest here, the fate of WTI was sealed years ago — and the latest proclamation that Brent crude has overtaken WTI as the global benchmark should be little more than an afterthought.
The rise of Texas Tea started back in the early 1980s, when the U.S. government's decontrol of oil prices changed the trading mechanics of crude oil, which led to the commoditization of WTI.
At the time, our domestic production was flowing at a rate of 8.6 million barrels per day, with approximately 30% of that oil coming from Texas.
What's more, it was some of the highest-quality crude that U.S. refiners could get their hands on...
WTI has an API gravity of about 39.6, making it quite light (having an API gravity over 10 means the petroleum is lighter and floats on water). It also has a sulfur content around 0.24%, making it very sweet.
But WTI's reign as the global oil benchmark was overthrown by Brent crude in 2013.
Why is Brent crude more expensive than WTI?
Simply put, the preference for Brent crude today stems from the fact that it may be a better indicator of global oil prices. Brent essentially draws its oil from more than a dozen oil fields located in the North Sea. It's also still considered a sweet crude, despite having a higher sulfur content than WTI.
Although most Brent is destined for European markets, it's already used as a price benchmark for other grades.
Bloomberg reports: “Brent represents the Northwest Europe sweet market, but since it's used as the benchmarks for all West African and Mediterranean crude, and now for some Southeast Asia crudes, it's directly linked to a larger market."
For years, the price differential between the two has only been a few dollars.
Every now and then, a shortage could push the price spread wider... but the divergence has been more drastic since 2010:
The problem for WTI has been the flood of oil flowing into Cushing from areas like North Dakota and Canada. We talked about the production boom taking place in North Dakota previously. As for Canada, imports have risen to record levels over the last few years — now around 3 million barrels per day.
Brent becoming the new global benchmark is something we've seen coming for years. And we weren't the only ones with this foresight...
The Saudis ditched WTI as a benchmark along with Kuwait back in 2009 for the heavier Argus Sour Crude Index (ASCI), based off the medium sour crude from the Gulf of Mexico. Iraq followed suit about a year later.
Considering WTI was treading water between $80 and $95 per barrel since, Brent was certainly closer to the OPEC basket:
It was also becoming the more popular go-to crude. Brent options increased more than 300% in 2012.
So does the 'official' ousting of WTI as the global benchmark mean the end for Texas Tea?
Isn't the crude flowing out of Western Texas from here on out the same light, sweet, conventional oil we've enjoyed in the past?
Take a closer look at crude production in West Texas, and you'll find that isn't the case.
West Texas Intermediate may not be a better indication of global prices than Brent, but it's a clear reflection of where the U.S. oil industry is headed.
Texas oil production is absolutely dominated by the Permian Basin. Located in West Texas, it holds the wells that gave the WTI its reputation as oil of the highest quality: light, sweet, and easy to refine.
Almost three-quarters of the state's production comes from the Permian Basin (more than one-tenth of the entire country's, too!). That's a significant contribution, considering Texas is far and away the largest oil-producing state in the U.S.
After a multi-decade decline, in 2011 we finally witnessed a resurgence in West Texas oil output:
Source: Texas Railroad Commission
Much of the production increase, however, came from unconventional fields — like the Spraberry field shown below (note how the other top fields are still declining).
Source: Texas Railroad Commission
Oil has been flowing from wells in the Permian Basin for nearly a century, producing more than 29 billion barrels since the first well was completed in Mitchell County.
Now companies can't rely on conventional means for their future production.
But it's still a much rosier outlook than the companies drilling in the North Sea, where production peaked more than 20 years ago:
Why fight it?
Rather than sit back and watch our unconventional oil boom continuously break new production records, maybe it's time you beat Wall Street to the profits...
We'll continue to bring you investment opportunities and advice on how to do just that.