What it means
WTI is a light, low-sulphur crude oil produced mainly in the United States. Because it is easy to refine into petrol and diesel, buyers are willing to pay a reliable premium for it compared with heavier, more sulphurous grades.
Its quality is exactly what makes it useful as a yardstick for other oil. The benchmark price comes from futures contracts, which are agreements to buy or sell a set quantity at a fixed price on a future date.
Each standard contract covers 1,000 barrels, and physical delivery is tied to the storage hub at Cushing, Oklahoma. Most traders never take delivery; they close out their positions before the contract expires.
For a business, WTI matters because it flows into costs and revenues far from the oil field. Airlines, haulage firms and chemical makers watch it to forecast fuel and raw material costs, while producers use it to estimate revenue per barrel.
A finance team that budgets for fuel without a view on WTI is effectively guessing. The price that a producer actually receives is rarely the headline benchmark figure.
It is adjusted by a differential, which reflects the quality of the oil, the cost of transport and local supply conditions. Finance teams therefore model realised price as the benchmark plus or minus that differential.
WTI is often compared with Brent crude, the North Sea benchmark used for much of the oil traded across Europe, Africa and Asia. The two usually move together but can drift apart when local supply, storage or transport constraints bite.
Contracts should always state clearly which benchmark they refer to.
In practice
Real-world examples.
Example
A regional haulage company burns about 400,000 gallons of diesel a year and sees its fuel bill track oil prices. The finance manager builds the budget around a WTI price range, then adds a sensitivity table showing what a $10 move per barrel does to annual profit. The board can see in one page how exposed the business is.
Example
An independent oil producer agrees a sales contract priced at WTI minus a fixed differential. The finance team books revenue at the monthly average WTI price less the differential, and accrues the difference if the final price is not yet known. Reported revenue therefore moves directly with the benchmark.
Example
A plastics manufacturer buys feedstock whose price is linked to crude oil. Procurement negotiates a clause that caps the price increase if WTI rises above an agreed level. The cap gives the manufacturer cost certainty without needing to trade futures itself.
Formula
Calculation
Realised price per barrel = WTI benchmark price + differential
Revenue = barrels sold x realised price per barrel
Suppose a small producer sells 20,000 barrels in a month. The WTI benchmark averages $75 per barrel, and the producer's contract carries a differential of -$3 per barrel because of transport costs. Realised price = 75 - 3 = $72 per barrel. Revenue = 20,000 x 72 = $1,440,000. Had the producer assumed the full benchmark price, expected revenue would have been 20,000 x 75 = $1,500,000, an overstatement of $60,000.Case study
Seen in the real world.
Prairie Ridge Freight is an illustrative, fictional trucking company with a fleet of 120 vehicles. In its first budget the finance director assumed fuel would cost the same all year, and a sharp rise in oil prices pushed its fuel bill $900,000 over plan.
The following year she linked the fuel budget to a range of WTI prices and agreed a fuel surcharge with customers that rose and fell with the benchmark. She also fixed the price on roughly half the expected fuel volume with a supplier hedge.
When oil prices rose again, most of the extra cost was passed on through the surcharge or covered by the hedge. The illustrative lesson is that knowing which benchmark drives a cost line is the first step to controlling it.
Watch out
Common mistakes.
- Assuming the WTI price is the price any producer or buyer actually receives, when real contracts add differentials for quality, location and transport.
- Treating WTI and Brent as interchangeable, when the gap between them can widen and change the economics of a contract.
- Believing that a trader holding a WTI futures contract will receive barrels of oil, when nearly all contracts are closed out before delivery.
Questions
People also ask.
What does WTI stand for?
It stands for West Texas Intermediate, a light, low-sulphur grade of US crude oil used as a pricing benchmark.
Why is WTI sometimes priced differently from Brent?
The two grades differ in quality and in where they are produced, stored and shipped, so local supply and transport conditions can push their prices apart.
How can a business protect itself from WTI price swings?
It can fix prices with suppliers, add surcharges to customer contracts, or use futures and options, which are financial contracts that lock in or cap a price.
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