I keep hearing analysts comment on Brent, WTI, and LLS. What are they talking about?
And then Brent texted me and was like, “OMG, you make me LOL. IDK, but IMHO, I have a GR8 GF. FWIW, ILY and I can’t wait to see you IRL. TYVM for all the TLC. SWAK, XOXO.”
For those of you who don’t speak 13-year-old-girl, the above is likely indecipherable. Before you start to grumble about how ridiculous kids are these days, stop and check yourself. Financial professionals and oil gurus talk like this every day. “WTI is at $45. LLS is at $48. How will this affect the P/DCF of my MLP? I just saw some pretty scary stuff on the NYSE. I’ve got to talk to my FA, ASAP!”
For those of you who don’t speak financial analyst or oil baron, hearing people discuss Brent, WTI, and LLS is more than a little confusing. Who is Brent and why does everyone want to interview him so badly?
As it turns out, Brent, West Texas Intermediate (WTI), and Louisiana Light Sweet (LLS) are crude oil benchmarks. Along with Dubai/Oman, Brent and WTI are the primary benchmarks used in the world today. Brent crude comes from the North Sea and is named after a goose. The Brent field is located halfway between Norway and Scotland and is said to produce a light sweet crude that, while similar, is considered slightly heavier than WTI. While you might assume from the name that WTI is priced in the Lone Star State, pricing actually takes place in the crude oil trading hub of Cushing, Oklahoma where oil from all over the US is sent via pipeline. Last, and least, is the Dubai/Oman benchmark. This Middle Eastern crude benchmark is not mentioned as frequently in public discourse as Brent and WTI, but is still considered significant in the oil arena. The prices of crude in both Dubai and Oman are averaged to create this benchmark, and Dubai/Oman oil is known for being significantly more sour than both Brent and WTI oil.
Benchmarks are important because they help buyers and sellers appropriately price crude oil. Unlike natural gas, crude oil produced around the world has different characteristics, including sulfur content and American Petroleum Institute (API) gravity. Because of this, these benchmarks have been established based on crude in a particular region which historically has ample and stable production. Notably, crude not produced within a benchmark’s region can still be priced to a benchmark because of shared characteristics. The US Energy Information Administration (EIA) chart below lists several different kinds of crude oil by sulfur content and API gravity and may give you an idea of the numerous variations.
Historically, Brent and WTI have tracked closely in price to each other. However, beginning in 2013, conversations that usually centered on WTI were increasingly focused on Brent. As US crude oil production increased, domestic infrastructure was unable to keep pace, leaving a great deal of oil trapped in Cushing and driving the price of WTI down. Brent consequently became more reflective of global oil prices. In 2014, LLS, which is the less commonly mentioned US Gulf Coast light sweet crude benchmark, became more relevant because of the volume of oil present there, unable to be exported. Today, we’re talking about all three benchmarks, because we’ve yet to come to a consensus about which should be most quoted.
For MLP investors, spreads have little impact on short-term MLP cash flows. However, a wide spread for a sustained period of time between two crude benchmarks that share similar characteristics may imply that infrastructure or legislative measures are needed to equalize the supply/demand imbalance. We could spend longer discussing the implications of new pipelines or the lift of the crude export ban; however, the purpose of our post today is primarily to help you navigate the jargon and to understand the significance of benchmarks. We hope we’ve done that because our readers are our BFFs. TTYL.