Brent vs WTI: Which crude to trade in 2022?
Volatility on the international crude oil markets has heightened in the past two months, with the Russian invasion of Ukraine increasing uncertainty and traders weighing the prospect of sanctions on Russia. Russia is the world’s second largest exporter of crude oil, after Saudi Arabia.
The spread between the international benchmark Brent and the US benchmark West Texas Intermediate (WTI) climbed in the first month of the war to its highest level since April 2020 but has narrowed again in the past month.
In this analysis, we look at the recent Brent and WTI crude oil price performance and the key drivers for the markets, along with some of the latest predictions for oil prices in 2022.
The difference between WTI and Brent
For those investors and traders at the beginning of their journey, the question of what is the difference between Brent and WTI can often occur.
Brent and WTI are the world’s two major oil markets. Brent crude oil is extracted from the North Sea and WTI is extracted in the US, primarily from Texas.
Brent is a high-quality light, sweet blend of crude oil, which refers to its low density and low sulphur content. Brent accounts for around two thirds of global oil pricing, and oil produced in other parts of Europe, the Middle East and Africa is priced at differentials to Brent based on its specifications.
How do traders compare WTI versus Brent? US-produced WTI crude is lighter and sweeter than Brent as it contains an even lower amount of sulfur. But the price for Brent crude vs WTI crude trades at a premium, as Brent supply will be restricted long term as the North Sea oil fields have been depleted, while oil production in North America from shale and oil sands has ramped up and the US has become a big exporter.
Crude oil futures are traded on commodity exchanges: Brent trades on the Intercontinental Exchange (ICE), while WTI trades on the New York Mercantile Exchange (NYMEX).
Brent vs WTI: Price performance
The Brent vs WTI price chart reflects the increase in price volatility so far in 2022. Price history shows that the market began trending higher in December.
There was a combination of factors driving the price, from rising demand amid lower-than-usual temperatures and global economic recovery to a potential shortfall in supply and geopolitical concerns, including US nuclear talks with Iran and the Russian invasion of Ukraine.
Past performance does not guarantee future returns.
Concerns about oil supply and demand balance lifted crude prices from the $60 a barrel range in December 2021 to the $90 level in mid-February. The markets then spiked above $100 following the Russian invasion of Ukraine on 24 February 2022.
According to the graph, by 8 March, Brent reached a high of $134.91, with WTI climbing to $123.70, in response to US President Joe Biden announcing a ban on fossil fuel imports from Russia.
The oil chart shows that prices for both Brent and WTI dropped back in mid-March but spiked again on 23 March, albeit to lower highs of $121.60 and $114.93, respectively, after a storm disrupted crude oil exports from Russia and Kazakhstan via the Caspian Pipeline Consortium (CPC).
Crude oil prices declined into April after President Biden on 31 March authorised the immediate release of one million barrels of oil from the US Strategic Petroleum Reserve (SPR) every day for six months to ease the sharp rise in prices.
Rising Covid-19 infections in China resulted in strict lockdowns that disrupted economic activity and reduced oil demand from the world’s largest consumer, adding further downward pressure.
The markets rebounded on 18 April as reports of a potential EU embargo on Russian oil imports and supply outages in Libya outweighed the impact of the SPR release and concerns about a slowdown in China.
Crude oil price outlook
“J.P. Morgan continues to expect an extended period of elevated geopolitical tensions and high-risk premium across all commodities with exposure to Russia,” the US investment bank said in its oil market outlook for 2022.
“Reflecting the higher risk premium and given the large supply shock, Natasha Kaneva, Head of Commodities Strategy, believes oil price will not only need to increase to $120 per barrel but stay there for months to incentivize demand destruction, assuming there are no immediate Iranian volumes entering the market.”
Analysts at Australian bank ANZ expect the SPR release to contribute to an easing in the tightness of the global oil supply and demand balance in the next six months.
Earlier this month they revised their three-month oil market forecast to $115 per barrel from $135 per barrel. However, they expect global inventories to “significantly decrease” over the long term and increased their 12-month target from $85 per barrel to $105 per barrel.
“Oil supply prospects are worsening amid the ongoing Russia-Ukraine conflict. Although the EU is still mulling the inclusion of oil in its sanctions, European buyers are already moving away from Russian oil,” ANZ analysts said in a client note.
“Easing Iranian sanctions could reduce pressure from the oil market. However, this is insufficient to compensate for the oil supply shortfall. OPEC+ is sticking with its gradual increase of 400kb/d, though the upcoming meeting will be important to watch.
“US shale producers are likely to continue their gradual production ramp-up, but they are unlikely to fully compensate for the market shortage, which could be as high as 3mb/d. As oil and services companies continue to shift away from Russia, market disruptions may continue over the medium and long term.”
Note that analyst predictions can be wrong. Forecasts shouldn’t be used as a substitute for your own research. Always conduct your own due diligence before trading, and never invest or trade money you cannot afford to lose.
Brent oil price prediction: 2022-2023
With so many factors at play, analysts’ price targets for Brent oil vary from $82 to $185, depending on a time frame.
Commodity traders at Canada’s TD Securities have reopened a long position on Brent crude oil “in anticipation of a strengthening in global commodity demand and of a repricing in supply risk premia”.
They had previously closed their long positions in early April “to reflect an easing in our real-time gauge of energy supply risks tied to massive Chinese lockdowns and to the coordinated SPR release”.
“Now, the set-up is ripe for a breakout as demand for energy products is firming once more, while our market-timing indicator continues to point to a strengthening uptrend,” the analysts wrote in an update on their position.
“We also continue to see structural risks to energy supply associated with persistent underproduction from OPEC+, related to a decade of underinvestment, along with stretched global spare capacity and critically low inventories which provide little buffer for any further disruptions.
“And yet, disruption risk is elevated amid high food and energy prices which could also lead to unrest across the globe, while the war in Ukraine, Libya's political crisis and Iranian sanctions also present potent supply risks.”
The TD analysts took a position to buy December 2023 Brent crude at $88.90, with a target price of $100 and a stop loss at $79. Their expected time horizon for the trade is three months.
According to JP Morgan, “if disruption to Russian volumes lasts throughout the year, Brent oil prices could exit the year at $185 per barrel, likely leading to a significant 3 mbd (million barrels per day) drop in the global oil demand.
“Even if shale production responds to the price signal, it cannot grow by more than 1.4 mbd this year given labour and infrastructure constraints.”
As of 1 April 2022, analysts at Dutch bank ING expected Brent crude oil to end the second quarter of this year at $103 and rise to $110 by the end of the year, then turn lower to $82 by the end of the second quarter of 2023.
Analysts at Canada’s Scotiabank also suggested on 12 April that the Brent price could decline in 2023, averaging $85 next year from $102 in 2022.
It’s important to note that analysts can and do get their predictions wrong. We encourage you to always conduct your own research before taking a position. Remember that the decision to trade should depend on your attitude to risk, your expertise in the market and the size of your trading account. Never trade money you cannot afford to lose.
WTI oil price prediction: 2022-2023
Scotiabank expect the WTI price to decline next year, averaging $82 from $98 this year.
Meanwhile, Dutch bank ABN Amro forecasted that WTI could average $105 in 2023, down from $128 this year. Analysts at US brokerage Zaner wrote in a note on 22 April that they were becoming less bearish on the short-term outlook for oil.
“While we will not rule out near term downside violations of $100 in June crude oil…we are becoming less negative to the energy complex because of ongoing tight supply conditions,” Zaner analysts said.
“On the other hand, unless macroeconomic sentiment improves significantly and/or the EU takes a big step toward a more conclusive ban of Russian energy, the path of least resistance could be sideways or lower.”
Zaner’s technical analysis showed the potential for a short-term uptrend in the price for the June WTI contract.
“The next upside target is 107.28. The next area of resistance is around $105.73 and $107.28, while first support hits today at 102.33 and below there are 100.47.”
Remember that analysts can get their forecasts wrong, therefore their expertise shouldn’t be used as a substitute to your own research. Always conduct your own due diligence before trading, and never trade money you cannot afford to lose.
The bottom line: Which oil to trade in 2022?
If you are considering trading Brent or WTI, it’s important to keep in mind that commodity markets can be extremely volatile, making it difficult to make accurate long-term forecasts.
We recommend that you always do your own research. Look at the latest market trends, news, technical and fundamental analysis, and expert opinion before making any trading decision. Keep in mind that past performance is no guarantee of future returns. And never invest more than you can afford to lose.
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CFDs enable trading on both bullish and bearish price fluctuations. You can either hold a long position, speculating that the price of a commodity will rise, or a short position, speculating that it will fall.
Be aware that as a leveraged product, CFD trading increases risk, magnifying not only profits but also losses if the asset price moves against your position.
Make sure you understand how CFDs work. Do your own research and always remember your decision to trade depends on your attitude to risk, your expertise in this market, the spread of your portfolio and how comfortable you feel about losing money. Keep in mind that past performance is never a guarantee of future returns. Never trade more money than you can afford to lose.
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FAQs
Why is Brent more expensive than WTI?
The global benchmark Brent crude oil trades at a premium to WTI crude oil as supply of oil produced in the North Sea is declining. The development of shale oil and oil sands resources in North America has increased supply of WTI.
Is Brent or WTI better?
Brent crude oil is the global oil market benchmark, while the increase in production of WTI has increased its importance on the global market. Whether one is a better investment for you depends on your personal preference for your portfolio, among other factors. You should do your own research to decide whether to invest in Brent, WTI or both.