WTI: what’s in a name?
Not all WTI crude oil is created equal: in reality, the term can refer to assorted crude grades of varying value. John-Laurent Tronche unravels the differences and explains why they matter.
Suppose you are a refiner somewhere in Asia, interested in diversifying your crude slate, and you have heard talk about booming West Texas oil production and exports out of the US Gulf Coast to the tune of a VLCC or more per day. So you decide to buy some WTI, but which?
There is WTI at Midland, at Cushing, Cactus, Corpus Christi, Magellan East Houston or MEH, Bridgetex and Longhorn. There are related terms like Midland Sweet and Domestic Sweet. There are price differences between many of these things, too. That is a problem with no obvious near-term solution. So let’s try to demystify what is meant by these terms.
West Texas Intermediate is the flagship US grade of oil produced in the Permian Basins of West Texas and transported by pipe, rail and truck to refiners near and far (like India far). Near the wellhead, it is called WTI Midland or Midland Sweet. The value of WTI at Cushing, Oklahoma, is the most commonly accepted benchmark for sales in the Americas of varying types of crude oil produced onshore and offshore in the US. It is called “Cash WTI.”
WTI at Cushing also forms the backbone of the de facto North American crude oil futures contract, CME Group’s NYMEX WTI Light Sweet Crude Oil, which for simplicity’s sake we’ll call NYMEX Crude from now on. Launched in March 1983, historically, it was often colloquially referred to in the market as “NYMEX WTI,” even though WTI was one of many grades that could be delivered at Cushing against the contract, which caused uncertainty.
“Confusion over what is sold has led to problems, Merc officials say,” an Associated Press article from August 1990 reads. “Some buyers who thought they were getting WTI have discovered they were getting a different grade.” That led the NYMEX at the time to tell the market it should refer to the contract as light sweet crude instead of WTI, though the three-letter acronym persists to this day.
CME says NYMEX Crude represents light sweet crude oil meeting a series of specifications including 37−42 API, less than 0.42% sulfur and other parameters. This includes WTI-type light sweet crude streams, as well as other blends referred to as Domestic Sweet, or DSW, that meet those specs. To simplify: NYMEX Crude is WTI that meets NYMEX parameters, as well as other crudes, which may be blends, that meet NYMEX parameters. Blended crudes are not bad, but the possibility that a buyer may get one is an uncertainty, and uncertainty leads to lower bids for the unknown and higher bids for the known.
The difference between physical, NYMEX-spec WTI and the NYMEX contract is what is called the exchange-for- physical, or EFP, which typically ranges from flat, or 0 cents/b, to roughly 5 cents/b. In other words, physical WTI that meets NYMEX specs is often worth a few cents more than plain-old NYMEX-suitable crude. Finally, there is a market for pure WTI at Cushing. Recently, a source indicated the going rate for pure, unblended WTI direct from the Permian to Cushing was 90 cents/b more than NYMEX-suitable WTI. An absolute guarantee of quality is nearly a full dollar over what, in theory, should be the same grade, if you figure that all WTI is Midland WTI.
Why? Refiner concerns about the significant amount of blending that goes on at Cushing — where crudes from all around North America comingle — has led to a significant price difference between DSW (NYMEX crude that is not WTI), NYMEX- suitable WTI, and virgin WTI from Midland. To ease this confusion, CME Group in mid-December said it would amend Chapter 200 — essentially, the rulebook for NYMEX Crude — by adding additional quality requirements for physical crude deliveries against the January 2019 contract month and beyond. Its move followed an identical move announced one day earlier by Enterprise Products Partners, one of two midstream outfits to which pipeline access is a must for barrels to be included in NYMEX Crude delivery. The second, Enbridge, has not publicly expanded its definition of WTI, although S&P Global Platts understands the company has told customers it is following suit. Enbridge did not respond to requests for comment.
“CME Group is amending the contract specifications to include five additional quality test parameters which will provide assurance that the quality and integrity of West Texas Intermediate (WTI) is maintained,” the exchange said at the time. The changes have been applauded by refiners — largely through their work via the Crude Oil Quality Association, which recommended the Enterprise- and CME-adopted changes — but it remains to be seen whether this results in a narrower spread between “pure” WTI Midland at Cushing and WTI at Cushing that’s suitable for NYMEX delivery. In other words, as a result of the changes, does the perception of WTI at Cushing — or Domestic Sweet — improve?