by David Fessler, Investment U Senior Analyst
Tuesday, September 6, 2011: Issue #1594
Brent crude is the largest global classification, or benchmark, for crude oil. It’s used to set the price for about two-thirds of the world’s internationally traded crude oil contracts.
West Texas Intermediate (WTI) is the other common crude oil pricing reference. Back in 2007, WTI traded at a premium to Brent. At the time, this was perfectly reasonable. WTI crude is a light crude oil, while Brent is heavier oil, and needs more refining.
But a lot has happened since 2007…
All of this coupled with similar increases in demand from other emerging countries has kept upward pressure on oil prices in general, and Brent in particular…
Factors Keeping WTI Prices Depressed
In stark contrast to a plethora of problems on the international front, here in the United States there are factors at work pushing WTI crude prices down.
We actually have an oil glut here as a result. Most of our imported oil now comes from Canada. Our neighbors to the north are pushing so much of it into the United States that our pipelines and storage facilities can’t handle it.
The two biggest parts of the bottleneck are:
Taken together, all of the factors mentioned above have caused WTI to plummet by 30 percent (it sits at $87 and change as I write this), and increasingly widen the gap between Brent and WTI crude prices.
The graph ,courtesy of the Bespoke Investment Group, illustrates the growing disparity or “spread” in prices.
As you can see, the delta between the two has really widened since the beginning of the year. It hit a record high of $26.21 a barrel on August 19.
Of course, the glut in Cushing is in part due to slower demand as a result of an anemic economy that’s persisted for several years.
The growing disparity between the two has a lot of analysts questioning whether WTI is still a relevant benchmark for anything other than U.S. oil prices. The historical dynamic of the United States driving the world’s oil prices is fast becoming irrelevant.
As China, India and other emerging markets continue to tighten the global supply-demand balance, more analysts regard Brent as “the” global benchmark for oil prices.
Companies With Exposure to Brent Crude
It follows that as an investor, particularly if you want exposure to what are likely to be increasing oil prices, you focus on companies with exposure to Brent crude. One of the easiest ways to do this is via the United States Brent Oil Fund (NYSE: BNO).
This futures-based commodities fund invests in solely in Brent crude. So far this year, it’s up 20.74 percent. Compare that to the United States Oil Fund (NYSE: USO), which invests primarily in WTI futures. It’s down 12.59 percent year-to-date.
Want to invest in oil? Make sure you pick the right companies, or even easier, funds that invest in the oil directly. As you can see from the above example, it can make a big difference in your portfolio returns.