Brent Crude Or WTI Crude Oil - Do We Know Which One Is A Better Investment?

Includes: BNO, USO
by: Arie Goren

Future contracts for WTI Crude are traded on CME, and both products, Brent Crude and WTI Crude, are traded on IntercontinentalExchange - ICE. In addition, there are ETFs for the two types of crude oil, the most famous are United States Brent Oil (NYSEARCA:BNO) for Brent crude and United States Oil (NYSEARCA:USO) for WTI crude. First, let us explain the difference between the two types of crude oil, and then we can try to find out which one is a better investment.

Brent Crude is a low-sulfur ("sweet") light crude oil originated in the U.K. and the Norwegian sectors of the North Sea. Brent is the leading global price benchmark for Atlantic basin crude oils. It is used to price two thirds of the world's internationally traded crude oil supplies.

West Texas Intermediate WTI, also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing, especially in the U.S.A. WTI crude is lighter than Brent crude, and it contains about 0.24% sulfur, it is sweeter than Brent, which has 0.37% sulfur. Crude oil, which contains less than 0.5% sulfur, is considered sweet crude; the lighter and sweeter the oil, the easier it is to refine and be used for more desirable refining products. In contrast to Brent crude, which is a waterborne cargo market where crude oil arrives in discrete quantities, WTI is a mid-continent pipeline market, where crude oil flows continuously at near-constant rates. Although WTI crude is lighter and sweeter than Brent crude, since 2010, Brent's price has been higher than WTI's price, mainly due to geographical and political reasons.

The table below presents the change in the price of the future contracts for WTI crude and Brent crude in 2011, as well as the return from investing in WTI crude ETF, USO and from investing in the Brent crude ETF, BNO.

The table clearly shows that although the price appreciation of both types of oil was not considerably dissimilar, 8.15% for WTI crude and 9.96% of Brent crude, the return from the ETFs was completely different. Investing in the Brent ETF BNO throughout 2011 would give a profit of 19.52%, while investing in the WTI ETF USO would give a loss of 2.28% throughout the same period. The reason for this is that WTI crude was in Contango in 2011, while Brent crude was in Backwardation (a comprehensive explanation about the influence of contango and backwardation on long term investment in commodities can be found in my article here).

So let us check the situation of Contango or Backwardation for both crude oils right now. The prices of the future contracts for both types of oil are shown in the tables below.

ICE Brent Crude Futures on July 31, 2012

CME WTI Crude Futures on July 31, 2012


On the one hand, Brent crude futures contracts show an average monthly Backwardation effect of 0.39%, which is an advantage when coming to roll over expiring contracts. WTI crude futures contracts show an average monthly Contango effect of 0.28%, which makes the investor pay more for the next contract, obviously a disadvantage. On the other hand, the WTI crude is some twelve percent cheaper than Brent crude for a product that has the same quality as the Brent crude, if not higher. That tendency has started in 2010 due to political and geographical issues, and its future duration is yet unknown. This contradicting argument makes it difficult to reach a clear conclusion about which of the two crudes represents a better investment at the moment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.