West Texas Intermediate loses out to Brent on limited supplies

The American crude oil price benchmark is cheaper compared to the Brent, but it does not appeal to the wider oil market, including Indian refiners, due to its restricted global supplies.

Known as West Texas Intermediate (WTI), it is almost $12 a barrel cheaper compared to Brent today, but its accessibility is an issue as the US does not export crude oil and WTI price is generally for oil originating from North/South America or sold in the region.

Since the price at which domestic refineries buy their crude oil has a direct bearing on the retail rate of petrol and diesel, they are often alleged of buying expensive crude. Every dollar increase in international crude oil prices would mean almost 45-50 paise a litre rise in retail rates of auto fuels.

But the local refiners say that modern refineries such as Essar and Reliance Industries, Vadinar and Jamnagar units do not have any preference for Brent-linked crude oil. Further, mere linkage to WTI does not ensure lower price, as the premiums charged over WTI are hefty for very heavy grades, officials from both domestic public sector as well as private sector refineries said.

“A buyer will purchase the best crude available at the most competitive price based on its refinery configuration,” an industry official said. Brent and WTI are among the price benchmarks used for crude oil trading. While Brent is water borne, WTI is landlocked. Indian crude oil basket, the price at which Indian refiners buy their crude, is based on ratio of an average of Oman/Dubai and Brent.

The US Energy Information Administration expects the WTI discount to Brent at an average $12 a barrel during the fourth quarter of 2013 and $9 per barrel in 2014. A domestic exploration company official said that the primary reason why WTI has lost its benchmark status is lack of adequate evacuation infrastructure. This has led to Brent emerging as a global benchmark.

Speaking to Business Line, Antoine Halff, Head of Oil Industry & Markets Division/Editor, Oil Market Report International Energy Agency, agreed that WTI is disconnected from the international oil market, and is very specific to the US market.

Back home, an Essar Oil official said that despite higher rates Brent-linked crude oil remains the most traded because the US does not export crude oil.

Echoing what Halff said, Essar added, “With the US crude market isolating itself from the rest of the world, pricing international grades off the WTI, which is prone to fluctuations based on the internal dynamics of the US sub-continent, does not appeal to the wider oil market.”

“Brent is also a more widely accepted marker because it prices almost all of the crudes coming out of the Atlantic basin,” the official added.

On whether refinery configurations restrictIndian refiners from using WTI , an oil industry official said, “Today, Indian refineries process crude which is more difficult than WTI-linked oil. So, this argument no longer completely holds true.”

Halff said, “Should the US amend its regulations or make American crude oil available to the global market, the US benchmark prices would realign themselves with international prices and gain renewed relevance for importers around the world. Whether WTI remains the key US reference price or is eclipsed by a new American-based benchmark, US-linked grades could become a force to be reckoned with in international markets.”


(This article was published on December 23, 2013)
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