What is WTI Crude Oil?
West Texas Intermediate Crude Oil, known as WTI Crude Oil, is a type of crude oil that is one of the major benchmarks for oil pricing worldwide. It is a high-quality, light, sweet crude oil primarily produced in the United States, with a significant portion of it coming from the Permian Basin in West Texas. The price of WTI is often compared to other crude oils, such as Brent Crude, to assess price differentials and trends in the global oil market.
Crude oil is often seen as a hedge against inflation. When inflation is expected to rise, the prices of commodities like oil may also increase. Investors may allocate funds to WTI Crude Oil to protect their purchasing power.
WTI Crude Oil is one of the most actively traded commodities globally, with highly liquid futures markets. This liquidity provides investors with the ability to enter and exit positions with relative ease, which is attractive for both short-term traders and long-term investors.
WTI Crude Oil historical performance
Texas quickly became a major oil-producing region, with one of the earliest significant discoveries occurring in 1901. The WTI benchmark was established in 1920, taking its name from the West Texas region and "intermediate" from its density and sulphur content.
Over time, WTI established itself as a major international oil benchmark, and it continues to play a significant role in the pricing and trading of oil on the global market.
The first big oil price shock came in 1979 amid booming demand and a drop in production triggered by the Iranian revolution.
Prices stabilised in the early 1980s, and WTI traded in a well-established range until 2002, rarely exceeding $40 per barrel.
The 2000s brought increased volatility that culminated with the oil price shock in 2008, which saw WTI reach a high of $147. Prices collapsed as a recession hit the global economy but started to rebound in 2009.
The oil price plunge of 2014-2016 pushed WTI as low as $26.08, and the beginning of the COVID-19 pandemic even caused WTI to trade at a negative price for a short while. A dramatic rebound followed, with WTI reaching a high of $129 after Russia invaded Ukraine in early 2022.
What affects the price of WTI Crude Oil?
The price of WTI Crude Oil can be influenced by the interplay of several factors, including supply-side and demand-side, as well as geopolitical and economic events.
One of the principal factors that can affect the price of crude oil is production. When production is high and oil is abundant, prices tend to decrease. Disrupted or reduced production usually results in a price increase.
Environmental policies such as climate change concerns and policies aimed at reducing carbon emissions can affect the long-term outlook for oil demand and, consequently, prices.
Another factor that can impact prices is the level of oil inventories, including both crude oil and refined products. High inventories can indicate an oversupplied market, while low inventories may suggest tighter supply conditions.
The Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC oil-producing countries often coordinate their production levels to influence oil prices. Production cuts or increases by these countries can have a substantial impact on the global oil market and WTI prices.
Geopolitical events such as conflicts, wars, and political instability can cause disruptions in oil-producing regions, which lead to supply disruptions and, consequently, price increases. For example, tensions in the Middle East have historically had a significant impact on oil prices.
What to watch out for when trading WTI Crude Oil?
When trading WTI Crude Oil, investors keep an eye on the following announcements in the economic calendar:
- US Energy Information Administration (EIA) Weekly Petroleum Status Report: The EIA releases a weekly report that provides data on US crude oil inventories, production levels, and refinery utilisation rates. Large inventory builds can indicate oversupply and put downward pressure on oil prices, while inventory draws can have the opposite effect.
- Nonfarm Payrolls (NFP) Report: The US NFP report, released monthly by the Bureau of Labor Statistics, provides insights into employment trends. Strong job growth may suggest increased economic activity and potentially higher oil demand.
- Consumer Price Index (CPI) and Inflation Data: Rising inflation can impact oil prices, as it may indicate increased production costs and a potential reduction in the purchasing power of currencies, including the US dollar.
- OPEC and Non-OPEC Production Decisions: The Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC oil-producing countries often coordinate production levels to influence prices. Production cuts by these groups can lead to higher prices, while increases in production can put downward pressure on prices.
- Interest Rates: Central bank policies, such as changes in interest rates, can impact economic conditions and, consequently, oil demand. Higher interest rates can affect borrowing costs and economic growth.
- Trade Agreements and Tariffs: Trade tensions and negotiations between major economies can impact the global economic outlook and, consequently, oil demand.
- Weather Reports: Weather forecasts, especially those related to hurricanes, storms, or extreme cold snaps, can disrupt oil production, transportation, and refining, leading to price volatility.