Crude Oil (WTI)

What Is Crude Oil (WTI)?

Oil is not one product. Hundreds of crude grades are pumped around the world, and they differ in density and sulfur content, which decides how much gasoline and diesel a refinery can get from each barrel. To price all of them, traders use a handful of benchmark grades, and West Texas Intermediate is the reference for the United States.

WTI is light, meaning it has low density, and sweet, meaning it contains little sulfur, usually well under 0.5%. Both qualities make it easy and cheap to refine into high-value fuels. The name comes from the oil fields of West Texas, although today the grade also covers crude from other US basins that meets the same specification.

When a news report says “oil rose $2,” it usually means the front-month WTI futures contract or its main rival, Brent. Other grades then trade at a premium or a discount to these benchmarks depending on their quality and location, so a single futures price ends up anchoring millions of barrels of physical deals.

How Does WTI Crude Oil Pricing Work?

For traders, WTI is above all a futures market. The New York Mercantile Exchange (NYMEX) launched its light sweet crude contract in March 1983, and it became one of the most traded commodity futures in the world. Each contract covers 1,000 barrels, so a $1 change in price moves the contract’s value by $1,000.

Delivery is what ties the contract to real oil. A holder who keeps a long position through expiry must take the crude at Cushing, Oklahoma, a town with a large tank farm and pipeline junction. Because anyone can deliver or receive barrels there, the futures price and the physical spot price at Cushing converge as expiry approaches.

Short-term moves are driven largely by inventory data. The US Energy Information Administration publishes weekly stock figures every Wednesday, and traders compare them with forecasts. Suppose analysts expect crude inventories to fall by 1 million barrels, but the report shows a 5 million barrel draw.

That larger draw signals stronger demand or weaker supply, so buyers step in and WTI climbs from $75 to $77 within minutes. A trader holding one long contract gains $2,000. A trader who was short the same contract loses $2,000, and if the account was thin, the move could trigger a margin call before the day ends.

WTI vs. Brent Crude

Brent is the other global benchmark, based on crude from the North Sea. The two grades are similar in quality, so the gap between them reflects geography more than chemistry. WTI is priced inland, while Brent is loaded onto tankers at sea and reaches buyers in Europe, Africa and Asia directly.

Location can matter a great deal. In 2011, rising US shale output filled Cushing faster than pipelines could move the oil to the coast, and WTI traded more than $20 below Brent. The gap narrowed as new pipelines opened and after the US lifted its ban on crude exports in December 2015.

Why Is WTI Crude Oil Important for Traders?

Oil prices feed into almost every other market. Higher crude raises fuel and transport costs, which pushes up inflation and can change the path of interest rates. Oil is priced in dollars, so it also interacts with the currency: a stronger dollar makes crude more expensive for foreign buyers, which is why traders often watch WTI alongside the DXY index.

Supply decisions add another layer. Producers in OPEC and its allies can cut or raise output by millions of barrels per day, and a single meeting can move WTI by several dollars. US shale drillers respond to prices too, but more slowly, because new wells take months to bring online.

The main risk is volatility. WTI climbed to about $147 in July 2008 and fell below $35 by December of the same year, a drop of more than 75% in five months. Its most extreme moment came on 20 April 2020, when storage at Cushing was nearly full and the expiring May contract settled at about −$37 per barrel. Traders who hold WTI through CFDs avoid delivery, but they still carry the price risk and pay rollover costs as the underlying contract changes month.

Key Takeaways

• WTI is a light, low-sulfur US crude grade and the main oil price benchmark for North America.
• Its price is set by NYMEX futures of 1,000 barrels, delivered physically at Cushing, Oklahoma, so each $1 move changes a contract’s value by $1,000.
• Weekly inventory data, OPEC supply decisions and the strength of the US dollar drive most short-term moves in WTI.
• WTI and Brent are similar in quality, and the spread between them mainly reflects the cost and capacity of moving inland US oil to the coast.
• Physical delivery can make WTI futures behave strangely near expiry, as the negative price of April 2020 showed when storage ran short.