Novice traders entering the world of commodity trading for speculative purposes are likely to encounter one of the major benchmarks for global oil prices: Brent Crude Oil.
But what is Brent Crude Oil, and why is it so important?
Crude oil is among the most actively traded commodities worldwide. Therefore, understanding its complexities and nuances can be very advantageous for traders.
In this article, we look in-depth at Brent Crude Oil – its origin and history, how it differs from West Texas Intermediate (WTI) Crude, and how it is traded on commodity markets.
Understanding Brent Crude Oil
Brent Crude Oil derives its name from the Brent oilfield, which is located in the North Sea between the Shetland Islands and Norway. It is considered a light form of crude oil, also sometimes referred to as a “sweet” type of crude oil, meaning it is low in density and has a low sulphur content.
These characteristics make Brent Crude ideal for refining into combustible fuel, which is why it accounts for approximately two-thirds of all barrels traded on global oil markets. For this reason, the price of Brent Crude is an appropriate benchmark for global oil prices.
Brent Crude Oil’s importance as a pricing benchmark means it is a critical part of the global economy. Its price is also used to help determine the prices of petroleum products such as petrol and diesel fuel, specifically in Europe, Africa, and the Middle East.
Historically, Brent Crude has always significantly shaped the global energy sector, and this trend will likely continue for the foreseeable future.
Brent Crude Oil History
Brent Crude Oil was first discovered in 1971 when exploration of the North Sea area was in its infancy. During the 1980s, Brent’s popularity as a benchmark for world oil prices was cemented due to its geographically convenient production location and relatively low sulphur content.
The importance of Brent Crude overlapped with the rise of the Organization of the Petroleum Exporting Countries (OPEC), which sought to control oil prices by limiting the amount of oil available on the market.
In 1988, the International Petroleum Exchange (now known as the Intercontinental Exchange) launched the first Brent Crude Oil futures, which sparked international growth and recognition for Brent Crude.
Furthermore, Brent Crude is often referred to as the Brent Blend, a blend of crude oil taken from oilfields in the North Sea. The price of these oils serves as a global benchmark for oil prices.
Brent Crude Oil vs WTI Crude Oil
Another significant crude oil in the world of commodity trading is West Texas Intermediate (WTI) Crude Oil, which also serves as a critical pricing benchmark for oil.
WTI Crude Oil, which is also referred to as Texas light sweet, is extracted mainly in Texas, although some is derived from other Midwest and Gulf Coast regions. It provides the fundamentals for the US oil market and influences global prices.
Brent Crude Oil and West Texas Intermediate (WTI) Crude are similar in that they are both light and sweet oils. However, there are also some critical differences between them.
Firstly, Brent Crude Oil is extracted from the North Sea, whereas WTI Crude comes from the United States, primarily the Texas and Gulf Coast regions.
Since Brent and WTI are derived from different geographical regions, there are slight differences in their sulphur content, with Brent Crude Oil possessing a slightly higher sulphur content than WTI Crude.
Secondly, the transportation costs for each type of crude oil can vary because of several factors. For example, the price for transporting Brent Crude is typically lower than WTI because its offshore production provides easier access to international shipping routes and underwater pipes.
In contrast, WTI Crude is produced onshore and sent via pipeline to Oklahoma, which entails a more complex distribution process.
However, despite WTI Crude being more expensive to distribute, due to continuous advancements in oil exploration and drilling, along with the fracking performed by WTI Crude, it has become cheaper than Brent Crude.
In summary, the key differences between these two benchmark oils are their extraction location, sulphur content, transportation costs, and comparative pricing.
How to Trade Brent Crude Oil
Brent Crude oil can be traded on commodity markets via spot contracts or futures contracts.
Spot contracts reflect the current market value for a commodity, allowing traders to take immediate delivery of goods such as oil.
On the other hand, futures contracts are agreements to buy or sell commodities at a predetermined price in the future. Therefore, the delivery of a good purchased on the futures market takes place on a predetermined date in the future, as specified in the futures contract.
That being said, most investors that trade on commodity future markets do so for speculative purposes and do not intend to take physical delivery of the commodity.
Brent Crude oil futures are available to trade on the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE). In addition, some forex and CFD brokers offer their clients exposure to Brent Complex components which do not involve futures contracts or the physical delivery of the commodity.
Investors interested in trading Brent Crude oil should understand the risks associated with speculating on the commodity market. The price of oil can be highly volatile, and outside influences like geopolitical events and extreme weather events can cause severe fluctuations.
Additionally, it is crucial that novice investors understand what futures contracts are, how they work, and the margin requirements needed before they start trading.
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Conclusion
Brent Crude Oil is an essential benchmark for the international oil market. It has distinct properties that make it a highly desired and sought-after asset. Its importance as a pricing tool for the world’s major oil markets has made it one of the most actively traded and sought-after oils.
Investors looking to trade Brent Crude Oil can do so through several exchanges and individual brokers, although risks associated with investing should be thoroughly understood before making any trades.
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