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Page added on April 29, 2007

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A Tale of Two Crudes

One of the most unusual and interesting developments in the past two months has been the stark divergence in performance between two of the most common crude oil benchmarks in the world–WTI and Brent crude.

To make a long story short, Brent is a slightly lesser grade of oil than WTI. Both oils are considered light, sweet crudes, but standard Brent has an American Petroleum Institute (API) gravity of about 38.1 degrees and a sulphur content of 0.39 percent. In contrast, WTI has an API gravity of 40 degrees and a sulphur content of 0.3 percent.

This is one reason why WTI has historically traded at a slight premium price to Brent. In fact, based on the past seven years of data, WTI has averaged a premium of $1.72 to Brent. Check out the chart below.

The chart above shows the premium of WTI over Brent in terms of dollars per barrel based on weekly data going back to April 2000. The solid line shows that average premium of about $1.72.

As you can see, prior to 2006 there were a few short-lived spikes when the price of Brent temporarily exceeded WTI. But the action in the past year looks notably different: Brent has moved to a premium on several occasions.

Since the beginning of 2007, that pattern has become even more notable; Brent has been trading at an ever-widening premium to WTI. That premium now exceeds $4 per barrel, a far cry from the normal discount of $1.72.

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