West Texas Intermediate (WTI): Definition and Use As a Benchmark

What Is West Texas Intermediate (WTI)?

West Texas Intermediate (WTI) is a grade of crude oil and one of the main three benchmarks in oil pricing, along with Brent and Dubai Crude. WTI is considered a high-quality oil that is relatively easy to refine.

WTI is known as a light sweet oil. It contains less than 0.50% sulfur, whereas the norm is about 0.24% to 0.34%, making it "sweet." It also has a low density, making it "light."

WTI is the underlying commodity of the New York Mercantile Exchange's (NYMEX) oil futures contract.

Understanding West Texas Intermediate (WTI)

WTI is the main oil benchmark for North America, as it is sourced from the United States. It originates mainly in the Permian Basin, the site of the nation's highest-producing oil field. The oil travels via pipeline from Texas to refineries in the Midwest and the Gulf of Mexico.

The main delivery point for physical exchange and price settlement for WTI is Cushing, Oklahoma, known as "The Pipeline Crossroads of the World." The Cushing hub delivery system consists of 35 (20 inbound and 15 outbound) pipelines and 16 storage terminals.

The hub has 90 million barrels of storage capacity and accounts for 13% of U.S. oil storage. The inbound and outbound capacity is 6.5 million barrels a day.

West Texas Intermediate As an Oil Market Benchmark

A benchmark in the oil market serves as a reference price for buyers and sellers of crude oil. Oil benchmarks are frequently referred to in the media as the price of oil.

Brent crude and WTI crude are the most popular benchmarks, but their prices are often contrasted. The difference in price between Brent and WTI is called the Brent-WTI spread.

WTI is not the most commonly used benchmark globally. That honor goes to Brent, which is used as a benchmark globally in two-thirds of oil contracts.

WTI and Brent, however, are both considered high-quality oils and therefore are the two most important oil benchmarks in the world.

WTI vs. Brent

WTI has a sulfur content between 0.24% and 0.34%, whereas Brent has a sulfur content between 0.35% to 0.40%. The lower the sulfur content of an oil, the easier it is to refine, making it more desirable to producers. A sulfur content below 0.5% is considered sweet.

Both benchmark oils are considered sweet, but WTI is sweeter, making it a bit easier to refine.

Theoretically, WTI crude should trade at a premium to Brent crude, given the quality, but this is not always the case. While the two crude oil varieties can trade at similar price points, each one has its own unique supply and demand market, and therefore its price reflects distinct market fundamentals.

Since the shale boom in the U.S., which resulted in a production increase of WTI, the price of WTI has gone down and usually trades at a discount to Brent. Brent is also tied to more worldwide oil markets, meaning that more factors are influencing its price.

Furthermore, transporting WTI overseas to Brent crude's market can be costly, making it difficult for WTI to compete with Brent crude in terms of pricing.

The Bottom Line

West Texas Intermediate is a high-quality crude oil sourced in West Texas. As one of the world's foremost sources of crude oil, WTI is a benchmark for the U.S. oil industry and investors. When you hear a reference to crude oil prices in a business report, it's the price of West Texas Intermediate that is being quoted.