Crude oil: Brent vs WTI, OPEC+, inventories and the oil price

What you will learn

• What API gravity and sulphur content say about crude quality and price
• How Brent and WTI differ and what the Brent–WTI spread reflects
• How OPEC+ decisions and spare capacity influence the oil price
• How inventories and refinery margins (crack spreads) link crude to fuels

Explanation

Crude quality

Crude oil is not one product. Two properties matter most:

• API gravity, a density scale of the American Petroleum Institute. A higher number means lighter oil, which yields more high-value fuels such as gasoline and diesel.
• Sulphur content. Low-sulphur crude is called sweet, high-sulphur crude sour. Sour crude needs more processing.

Light sweet crude therefore usually trades at a premium to heavy sour crude. The size of that differential changes with refinery demand and supply of each type.

Brent and WTI

Brent is the main benchmark for internationally traded crude. The physical "Dated Brent" price is assessed from a basket of North Sea grades and, since 2023, also US WTI Midland crude delivered to Europe. ICE Brent futures (1,000 barrels) can be settled by an exchange for physical or in cash against the ICE Brent Index. Because Brent is waterborne, it reflects the seaborne world market.

WTI (West Texas Intermediate) futures on NYMEX (1,000 barrels) are physically delivered at Cushing, Oklahoma, a landlocked pipeline and storage hub. This makes WTI sensitive to local storage. On 20 April 2020, with demand collapsing and storage filling, the expiring May 2020 WTI contract settled at minus $37.63 per barrel: holders who could not take delivery paid to get out.

The Brent–WTI spread mainly reflects the cost of moving US crude to export markets, quality differences and local pipeline and storage conditions. It is not fixed.

OPEC+ and spare capacity

The Organization of the Petroleum Exporting Countries (OPEC) was founded in 1960. Since the Declaration of Cooperation of December 2016, OPEC members coordinate output with other producers, including Russia; this group is called OPEC+. Membership has changed several times, so check the current list on OPEC's website.

OPEC+ sets production targets, but actual output can differ from targets. The more important number is often spare capacity: the US Energy Information Administration (EIA) defines it as production that can be brought online within 30 days and sustained for at least 90 days. Large spare capacity tends to cap price spikes after a disruption; low spare capacity means a disruption has a bigger price effect.

Inventories

Stocks are the buffer between supply and demand. Rising stocks suggest supply exceeds demand; falling stocks suggest tightness. Key measures are US commercial crude stocks, stocks at Cushing, commercial stocks in the OECD (Organisation for Economic Co-operation and Development) countries and oil held on tankers. Government stocks such as the US Strategic Petroleum Reserve (SPR) are reported separately. A simple measure is days of cover = stocks ÷ daily demand. Low stocks usually go together with backwardation, high stocks with contango (see the Derivatives course). How to read the weekly reports follows in lesson 6.

Refining and crack spreads

Refiners buy crude and sell products. Their gross margin is the crack spread. A common simple version is the 3-2-1 crack: 3 barrels of crude produce about 2 barrels of gasoline and 1 barrel of distillate (diesel or heating oil). US products are quoted in dollars per gallon; one barrel = 42 US gallons. High cracks encourage refiners to process more crude, which supports crude demand.

Worked example

Hypothetical example: a 3-2-1 crack spread. Assumptions: WTI $70.00 per barrel, gasoline $2.10 per gallon, diesel $2.40 per gallon.

1. Convert products to barrels: gasoline $2.10 × 42 = $88.20; diesel $2.40 × 42 = $100.80.
2. Product value: 2 × $88.20 + 1 × $100.80 = $277.20.
3. Crude cost: 3 × $70.00 = $210.00.
4. Margin: $277.20 − $210.00 = $67.20 for 3 barrels, so $67.20 ÷ 3 = $22.40 per barrel of crude.

Part 2: Brent–WTI. Brent $74.50, WTI $71.00, spread $3.50. If shipping US crude to Rotterdam costs $3.00 per barrel (hypothetical), exporting earns only about $0.50 before other costs. A spread close to transport cost means the two markets are linked by trade flows.

Excluded: refinery operating costs, real product yields (rarely exactly 2:1), transport, quality adjustments and currency conversion.

Common mistake

Practice activity

Hypothetical data, no costs.

1. WTI is $65.00, gasoline $2.00 per gallon, diesel $2.50 per gallon. Calculate the 3-2-1 crack spread per barrel.
2. Commercial stocks are 420 million barrels and daily refinery demand is 20 million barrels. Calculate days of cover.
3. Market A has large spare capacity, market B almost none. A pipeline outage removes the same volume in both. In which market would you expect the larger price reaction, and why?

Key takeaways

• Light sweet crude usually trades at a premium to heavy sour crude.
• Brent reflects the seaborne market; WTI is delivered at Cushing and reacts to US storage.
• Spare capacity often matters more than the headline OPEC+ target.
• Inventories and crack spreads link crude to fuel demand.

Next step

In the next lesson you move from oil to natural gas and electricity, where seasonality, storage and the European TTF hub dominate prices.