WTI – West Texas Crude

WTI – West Texas Crude

One of two primary crude oil blends used to price oil as a commodity – the other being Brent oil, which is produced in the North Sea. WTI is mainly produced in the Midwest of the United States and the Gulf Coast regions.

Introduction to the Oil Market

The Oil Market - text

When we talk of trading oil, the oils we generally mean are WTI, which is short for West Texas Intermediate oil (also known as Crude Oil) and Brent Crude Oil, often referred to as Brent.

WTI is produced in the USA and Brent is produced in the North Sea. Both are high quality oils, and this means that once they have been extracted from the ground they can be refined to make it usable for lots of different purposes.

Uses include refining into petrol to power a car, as fuel in the generation of electricity and heating, and also to create plastics, petrochemicals and many other products. This therefore means that both WTI and Brent are constantly in very high demand around the world, and are consequently highly correlated.

The largest oil consumer nations include US, Japan, China, Germany, and the UK so when trading oil we always need to keep an eye on the major consuming nations to monitor whether their usage is increasing or decreasing.

An increase in demand will tend to mean an increase in prices, and similarly a decrease in demand will tend to mean a decrease in prices (provided that supply levels remain consistent)

The fact that oil has so many uses means that it is one of the most traded and volatile markets in the world.

For traders this presents huge opportunities, but when trading oil we need to pay particular attention to a wide range of supply and demand issues which can potentially have a huge impact on prices, often in a very short timeframe.

As well as supply and demand there are two key reports that oil traders must be aware of. The first of these is the weekly Department of Energy (DOE) Oil Inventory. This is released every Wednesday and quantifies how much oil stock is left in storage, for use in America (the largest consumer).

If inventory figures increase it implies that there has been less demand than previous weeks, and hence prices should fall. If inventory figures decrease it implies that there has been higher usage, and prices should therefore increase.

Another key report we pay attention to are the periodic OPEC reports, in which they outline production quotas for member states, thereby determining how much supply will be made available to world markets.

Their production quotas depend upon levels of world supply and demand – if demand is high or supply is low OPEC will increase production, thereby lowering prices. However if demand is low or supply is high, production levels will be cut.

The power that OPEC has in determining prices should therefore not be underestimated, and many people complain that the fact that countries eager to make as much profit as possible are responsible for determining supply levels is a potentially dangerous thing. This is one of the reasons why in recent years there has been a big push towards alternative fuel sources.

Another factor to be aware of when trading oil is that although oil is in high demand throughout the year, we tend to notice two seasonal periods where demand is larger than normal. These are the winter months, where oil is used as a heat source and during the summer months (known as the driving season) where there is an increase in petrol consumption due to families in America and Europe going on holiday.