Crude Oil Supply Battles keeping WTI and Brent Apart

Yes, crude oil is a commodity and therefore, by definition, substitutable between sources. However, unlike other commodities like the metals or the agriculturals, all crude oils are not created equal. Indeed neither are agricultural crops. Corn or sugar have specific grades with specific standards by which other grades are measured and therefore sell at premiums to or discounts from. Those standards are called benchmarks. WTI and Brent are benchmark products. However unlike corn or sugar whose variability’s are generally minor, crude oil varies greatly. The most important variables are weight, called specific gravity, which means how dense the stuff is, and “sweetness”, which refers to the sulfur content. Both of these variables directly affect the costs at which refineries can process the crude into refined products. Therefore practically all outputs sell at discounts or premiums relative to the benchmarks. This is the reason that Brent is blended together from the outputs form the over forty fields in the North Sea. More on this blending feature below.

Oil producers are divided into two groups; those who are members of the international oil cartel, called The Organization of Petroleum Exporting Countries (OPEC) and their non-member supporters, and the rest of the world, comprised largely of the North American producers. The rivalry between these two groups is intense. This is principally so because the cartel members are much more dependent on the commodity than are the non-cartel members. For non-cartel producers, their output is part of the long supply chain of economic activity in their economies of which they play their part. For the cartel members, crude is almost always their only, or certainly their principal economic output. Therefore it is in the cartel members’ interest to keep prices high, while the non-cartel members have a more cooperative, integrative role in their economies. Too, the cartel was established because of and functions in the context of economic abuse by the western consumer nations. Politics plays more of a role in the supply of oil than any other commodity.