WTI Benchmark Temporarily Breaks Down: Is It Really a Big Deal?

Since the adoption of formula pricing in 1986, West Texas Intermediate (WTI) has served as one of the main international benchmarks, along with Brent and Dubai, against which other types of crude oil are priced. While Brent remains the dominant benchmark for oil pricing outside the US, the latter


It has long been recognized that the link of WTI prices to other international benchmarks and to oil prices in other US regions is partly dictated by infrastructure logistics.1 The recent behaviour of WTI prices is a clear example of how pipeline logistics can dislocate WTI not only from the rest of the world, but also from other US regions.

The WTI market is characterized by a large number of independent producers who sell their crude oil to gatherers based on posted price. The oil is then brought into Midland and directed either towards the Gulf Coast refining areas or Cushing, Oklahoma. Cushing is an oil-trading hub and the delivery point for NYMEX light sweet crude oil futures contracts. Due to pipeline logistics, once the oil flows outwards from Midland towards Cushing, WTI can only go in one direction: north, towards Chicago. Thus, if there is a shortfall in demand from refineries in the Chicago area, there are no opportunities to re-direct oil flows out of Cushing towards other refining centers where there might be more demand for crude oil.

In the last two months, a combination of factors has resulted in relatively large supplies of oil flowing into Cushing. This occurred at times when demand was flattening due to refining outages and maintenance. In February, a fire at Valero