Crude oil has been a vital commodity in many economies since its discovery in the mid-1850s. In addition, the ubiquitous nature of crude oil derivatives, such as gasoline and plastic, means that crude oil plays a significant part in everyday life.
Most beginner investors interested in commodity trading, particularly the energy markets, will undoubtedly come across one of the most widely traded crude oils – WTI Crude Oil. WTI stands for West Texas Intermediate, a specific grade of crude oil sourced primarily from Texas.
But what is WTI Crude Oil?
This article addresses this question by exploring the history of WTI crude, explaining how it differs from other crude oils, and highlighting how traders can buy and sell this vital commodity.
Understanding WTI Crude Oil
WTI Crude Oil is an unrefined petroleum product extracted from underground reservoirs in North America and stored in facilities in the United States. It forms the backbone of the US oil industry because it provides the fundamentals for oil prices in the US.
After the raw crude oil has been extracted, it is transported via pipelines, mainly to Cushing, Oklahoma, where it is refined, stored and exchanged.
WTI Crude has a low sulphur content, and its composition is light and “sweet”, making it easier and cheaper to refine into gasoline and other petroleum-based products. Due to this low sulphur content, WTI Crude oil is highly sought after by refineries because it produces fewer emissions when refined.
WTI prices are influenced by a myriad of factors, including supply and demand, cost of production, geopolitical events, and extreme weather conditions. As a result, any significant event or change in one of these areas can cause the price of WTI Crude to fluctuate dramatically.
Overall, WTI Crude is an essential commodity on global markets, providing a reliable energy source for businesses and consumers. In addition, its low sulphur content means that WTI is cheaper to refine than other types of crude oil and is, therefore, in high demand across many industries.
WTI Crude Oil History
The oil rush in America began when “rock oil” was first discovered in 1859 in Titusville, Pennsylvania, by Edwin L. Drake. This marked the start of the modern petroleum industry and led to the term “black gold” being coined as the influence of oil in industry and commerce grew ever more essential.
During the early 1900s, a large petroleum reserve was discovered near Beaumont, Texas and by 1940, Texas dominated oil production in the United States.
The market for WTI proliferated as demand for petroleum-based products increased steadily throughout the 20th century with the growth of cars and air travel. By the 1970s, the United States had become one of the largest producers of petroleum in the world, driven mainly by the abundance of WTI Crude.
Fast forward to today, and WTI remains an integral part of the US oil industry and is widely traded worldwide.
WTI Crude Oil vs Brent Crude Oil
WTI and Brent Crude Oil are the most widely used benchmarks for global oil prices. However, these two oils have fundamental differences, mainly their extraction locations and compositions.
In terms of their locations, WTI Crude is derived from North America, mainly Texas. In comparison, Brent Crude is found in North Sea oilfields between Norway and the Shetland Islands.
The difference in location means that the two oils differ slightly in composition. For example, WTI has a lower sulphur content than Brent, which means that it creates fewer emissions. In today’s climate of increased environmental awareness, fuels that generate fewer emissions are more in demand than ever.
Furthermore, the logistical costs of the two oils differ because of where they are extracted. Brent Crude is produced offshore and is channelled via international shipping routes and underwater pipelines, making it cheaper to transport internationally.
WTI, on the other hand, is produced onshore and most of it is moved via pipelines to Oklahoma. This land-based distribution network means that the cost of moving WTI is higher than Brent Crude.
How to Trade WTI Crude Oil
WTI Crude Oil can be traded using commodity futures contracts on the New York Mercantile Exchange (NYMEX) and Intercontinental Exchange (ICE). In addition, investors can trade various commodity futures contracts based on WTI on these exchanges.
Buyers of futures contracts are essentially speculating on the price of a barrel of crude oil at various points in the future.
Investors can also trade WTI through other financial instruments, such as exchange-traded funds (ETFs). ETFs are investment funds that track the performance of the WTI Crude futures market.
In addition to these financial markets, investors can purchase shares in oil-focused companies involved in the exploration and production of WTI. Similarly, investors can trade shares in refineries that process WTI into other petroleum products, such as gasoline and diesel.
Some forex and CFD brokers also offer their clients exposure to WTI investment tools that do not involve futures contracts, ETFs, or shares.
Overall, WTI Crude oil can be traded in various ways, but novice traders should understand the risks associated with speculating on commodity markets. The daily fluctuation of crude oil prices can be extreme, and it is heavily impacted by geopolitical factors and extreme weather events.
Since its discovery, WTI Crude has helped fuel tremendous economic growth in the United States. Today, its role as a benchmark oil and its influence on oil prices is essential for both consumers and producers.
WTI Crude’s status as an essential commodity means it remains one of the most actively traded commodities worldwide.
The world’s current reliance on fossil fuels means that West Texas Intermediate will likely remain a pivotal player in the ever-evolving energy market for some years.
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