Crude oil is one of the most vital commodities in the world. Whether we realize it or not, it has a presence in our everyday lives and is a fuel that our world simply cannot function without. When it comes to crude investing, investors have long had two choices staring back at them: Brent oil and West Texas Intermediate (WTI) oil.
The two have stumped many for quite some time, as they search for the intricacies that make these seemingly similar commodities inherently different. While most investors are familiar with WTI, Brent leaves many scratching their heads. The best way to define Brent crude is to simply distinguish what makes it different from its counterpart [see also 25 Ways To Invest In Crude Oil].
What’s The Difference?
The name “Brent” stems from a shared project between Exxon Mobil (XOM) and Royal Dutch Shell (RDSA) who named all of their oil deposits after birds, including the Brent goose. Brent is also an acronym for the differing layers of an oil field: Broom, Rannoch, Etieve, Ness, and Tarbat. Brent oil is considered a more sour commodity than WTI, though both crudes are considered sweet oils. This is generally based on the sulfur content of the underlying fuel, with 0.5% being a key benchmark. When oil has a total sulfur level greater than half a percent, it is considered sour, while a content less than 0.5% indicates that an oil is ‘sweet’. Brent has a sulfur level of about 0.37%.
Sour oil is more prevalent than its sweet counterpart. It comes from oil sands in Canada, the Gulf of Mexico, some South American nations, as well as most of the Middle East. Sweet crude, on the other hand, is produced in the central U.S., the North Sea region of Europe, and much of Africa and the Asia Pacific region. While both types are useful, end users generally prefer sweet crude as it requires less processing in order to remove impurities than its sour counterpart. The majority of the world’s Brent is refined and found in the Northwest regions of Europe and is especially important to Scandinavian nations.
Because Brent is slightly more sour, the commodity often trades at a premium to WTI, though there is a fair amount of speculation as to how long this premium will last or if it will ever be erased. The premium comes from the fact that Brent requires more refining to be utilized in everyday machines and automobiles.
One of the most important things for investors to keep in mind is the individual price drivers of each underlying commodity. Below, we outline the most important factors playing into the everyday value of Brent oil.
- Global Economy: This is without a doubt the most important factor driving the price of Brent. If the global economy begins to sag, so too will this commodity, as it will mean lower demand from consumers. Likewise, when the economy is booming, Brent prices are likely to charge higher based on higher consumption of the fossil fuel. In recent years, the global economy has been anything but stable, making it impossible to predict how Brent will turn out in the future. Keep a watchful eye on economic developments to stay ahead of the curve.
- Geopolitical Tensions: This has always been a major issue as far as oil is concerned since the suppliers and consumers of this commodity do not always get along. With sanctions of foreign oil as well as a fair amount of political unrest in the Middle East, crude prices hinge on every development of these nations. We have seen the threats of war cause a massive premium in oil prices, which will more than likely happen again at some point in the future. Until we (and other nations) can reduce our dependence on foreign imports, geopolitical tensions will remain a major point of contention for Brent prices (and WTI as well).
- Emerging Market Demand: One factor that many overlook is the demand from the world’s most dominant countries, like China and India. Though none match the consumption of U.S. oil, their demand for the commodity still has a lasting impact on its prices. In recent years, many have accused these nations of being faced with a slowdown after years of rapid expansion. Should that ever occur, demand for oil will likely drop and put a dent in Brent prices [see also Doomsday Special: 7 Hard Asset Investments You Can Hold in Your Hand].
- Substitutes: For many years, people have been rallying around the concept of green energy, displacing the foothold that fossil fuels have in our everyday lives. While many argue that this is a long ways off (and others claim it is flat out impossible), substitute products are always in the works and it only takes one breakthrough to permanently damage Brent’s price.