INS Flipbooks

INVESTMENT FUNDAMENTALS Oil price benchmarks. © 2023 SEI 1 While both the West Texas Intermediate (WTI) and Brent Crude benchmarks track the price of crude oil, their oil composition, origins, and prices differ. WTI and Brent Crude, which serve as benchmarks for oil-price markets, fall into the category of light, sweet crude oil. "Light" refers to the density and "sweet" to the sulfur content. However, the similarities end here, as WTI and Brent Crude diverge in composition, origins, market, and price. WTI, Brent Crude, and Dubai/Oman WTI crude originates in the West Texas Permian Basin of the U.S. It is lighter and sweeter than Brent Crude oil and lends to the production of petrol. The WTI benchmark includes other types of crude oil originating in the U.S. as well as some imported from Canada, Mexico, and South America. Brent Crude, which is conducive to diesel fuel production, derives its name from the Brent and various other oil deposits in the North Sea, which borders Great Britain, Germany, Denmark, and Norway. The Brent Crude benchmark is also used to price additional European, African, and Middle Eastern crude oil. As the oil is extracted from the sea, it is generally easier to transport relative to land-locked oil such as Brent Crude, which travels via pipelines. Dubai/Oman crude comprises oil extracted from several Middle Eastern nations and shipped primarily to Asian markets. It is denser and has a higher sulfur content compared to WTI and Brent Crude. Where and how the oil is extracted, as well as how far and by what means it's transported, all factor into the price charged to oil buyers, and by extension, how it's valued by speculators. Moreover, the supply-demand dynamics of oil as well as market sentiment of the commodity also influence its price. As such, oil benchmarks are a useful tool in valuing contracts to buy and sell oil used by speculators, merchants, processors, and end users. It is important to note that, while indirectly related, oil benchmarks do not reflect the retail gasoline prices that consumers pay. Oil prices and the economy The rise and fall of oil prices have a trickle-down effect for both investors and consumers. Higher oil prices benefit domestic oil production and nations which export oil. Conversely, higher oil prices tend to foster inflation because the cost of transporting goods rises; manufacturers will raise prices of goods to compensate for higher costs. Consumers also tend to feel the ill effects of higher oil prices at the gas pump and the cost of plane tickets, which together tend to hamper travel and tourism. Moreover, higher oil prices will eat into the consumers' expendable income, which may dampen demand in the discretionary sector. Investors may pay close attention to how oil prices affect the business in which they choose to invest. For example, higher oil prices will eat into profit margins of fuel-reliant companies (e.g., shipping and air carriers, thereby making them less profitable. As previously noted, rising oil prices can also weigh on consumer travel, auto demand, and discretionary expenditures, all of which will have a negative trickle-down effect on the economy.

• Cover