Brent Crude is the largest global classification or benchmark for crude oil. It’s used to set the price for about two-thirds of the world’s internationally traded crude oil contracts.
West Texas Intermediate (WTI) is the other common crude oil pricing reference. Back in 2007, WTI traded at a premium to Brent. At the time, this was perfectly reasonable. WTI crude is a light crude oil, while Brent is heavier oil, and needs more refining.
But a lot has happened since 2007…
- India’s oil usage has risen 48 percent to 4 million barrels per day (bpd).
- China’s has gone from about 7.2 million bpd to 9 million bpd, a 25 percent increase.
- There have been two wars in the Middle East.
- Libya’s oil supply is offline for an indeterminate period of time.
- Ongoing maintenance in North Sea installations, and constant sabotage disruptions in Nigeria have also contributed to keep Brent prices high.
Factors Keeping WTI Prices Depressed
In stark contrast to a plethora of problems on the international front, here in the U.S. there are factors at work pushing WTI crude prices down.
We actually have an oil “glut” here in the U.S. as a result. Most of our imported oil now comes from Canada. Our neighbors to the north are pushing so much of it into the U.S. that our pipelines and storage facilities can’t handle it.
The two biggest parts of the bottleneck are:
- Not enough storage capacity in Cushing,Oklahoma.
- A shortage of pipelines to move the oil to the Gulf coast refineries for processing into finished products.
Taken together, all of the factors mentioned above have caused WTI to plummet by 30 percent, (it sits at $87 and change as I write this), and increasingly widen the gap between Brent and WTI crude prices.
The graph below courtesy of the Bespoke Investment Group illustrates the growing disparity or “spread” in prices.
As you can see, the delta between the two has really widened since the beginning of the year. It hit a record high of $26.21 a barrel on August 19.
Of course, the glut in Cushing is in part due to slower demand here in the U.S. as a result of an anemic economy, that’s persisted for several years.
The growing disparity between the two has a lot of analysts questioning whether WTI is still a relevant benchmark for anything other than U.S. oil prices. The historical dynamic of the U.S. driving the world’s oil prices is fast becoming irrelevant.
As China, India and other emerging markets continue to tighten the global supply-demand balance, more analysts regard Brent as “the” global benchmark for oil prices.
Companies with Exposure to Brent Crude
It follows that as an investor, particularly if you want exposure to what are likely to be increasing oil prices, you focus on companies with exposure to Brent Crude. One of the easiest ways to do this is via the United States Brent Oil Fund (NYSE: BNO).
This futures-based commodities fund invests in solely in Brent Crude. So far this year, it’s up 20.74 percent. Compare that to the United States Oil Fund (NYSE: USO) that invests primarily in WTI futures. It’s down 12.59 percent year-to-date.
Want to invest in oil? Make sure you pick the right companies or even easier, funds that invest in the oil directly. As you can see from the above example, it can make a big difference in your portfolio returns.
— David Fessler[ad#jack p.s.]
Source: Investment U