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Brent Crude vs. WTI: The Best Performing Commodity (BNO, USO)

March 12th, 2012

Jared Cummans:  Crude oil is one of the most vital commodities in the world. Whether we realize it or not, it has a presence in our everyday lives and is a fuel that our world simply cannot function without. But when it comes to crude investing, traders have long had two choice staring them in the face; Brent oil, and West Texas Intermediate (WTI) oil. The two have stumped many for quite some time, as they search for the intricacies that make these seemingly similar commodities inherently different. Beyond the attributes that set these two apart comes the question of which type of crude makes for a better investment. Recent historical data puts that question to rest, as one clear winner emerges [see also 25 Ways To Invest In Crude Oil].

What’s The Difference?

While there is a lot behind what separates these two commodities, the basic differentiating factor is that WTI is a lighter, sweeter crude, while Brent is more sour. This is generally based on the sulfur content of the underlying fuel  with 0.5% being a key benchmark. When oil has a total sulfur level  greater than half a percent, then it is considered sour while a content  less than 0.5% indicates that an oil is ‘sweet’. Sour oil is  more prevalent than its sweet counterpart and it comes from oil sands in  Canada, the Gulf of Mexico, some South American nations as well as most  of the Middle East. Sweet crude, on the other hand, is generally  produced in the central U.S., the North Sea region of Europe, as well as  much of Africa and the Asia Pacific region. While both types are  useful, end users generally prefer sweet crude as it requires less  processing in order to remove impurities than its sour counterpart [see also Crude Oil Guide: Brent Vs. WTI, What’s The Difference?].

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Because Brent is slightly more sour, the commodity often trades at a premium to WTI, though there is a fair amount of speculation as to how long this premium will last or if it will ever be erased. Aside from the differences in their overall makeup, the performance of each commodity is vastly different.

Brent and WTI: Head-to-Head

Perhaps the easiest way to track the historical performance of the commodities involves two ETFs, the United States Oil Fund (NYSEArca:USO) which tracks WTI futures, and the United States Brent Oil Fund (NYSEArca:BNO) which offers exposure to Brent crude. Since its inception in mid 2010, BNO and Brent oil alike have been slaughtering WTI, with a return of approximately 75% for the fund. Meanwhile, USO has gained just 25% in comparison; while this is still an impressive leap given the time period, it still doesn’t hold a candle to Brent. Narrowing the time frame to just 2011, BNO jumped 19.5% compared to a return of -2.1% for USO. As for this year, BNO is up 15% YTD while USO is up just 7.4% by comparison [see also 25 Ways To Invest In Natural Gas].

Perhaps the biggest question that comes from this data is how Brent has been able to outdo its competitor by such a large margin, despite both commodities being relatively similar in the grand scheme of things. The past two years have seen a fair amount of volatility from the Middle East, a region that produces a fair amount of the world’s Brent supply. With questions over the stability of these nations as well as a drop in supply from a number of heavy hitters, it comes as no surprise to see Brent make such large strides especially given that WTI production was relatively unharmed during all of this time [see also Iran Tensions And Crude Oil: What It Means For Your Portfolio].

The only issue that remains is how long the premium between the two will last and what will happen to Brent if the Middle East is able to fall into a more stable pattern. Brent’s gains have been astounding, but this could trap investors into buying in to a commodity that is set to fall based on overarching macroeconomic factors. At the same time, the Middle East has been consistently unstable in recent years, so it may be a while before we see the region calm down and Brent fall. If your mindset falls on that side of the equation, Brent is the best crude option for you as it has the potential to continually outperform WTI [see also 12 High-Yielding Commodities For 2012].

Written By Jared Cummans From CommodityHQ  Disclosure: No positions at time of writing.

CommodityHQ offers educational content, analysis, and commentary on global commodity markets. Whether you’re looking to speculate on a short-term jump in crude or establish a long-term allocation to natural resources, CommodityHQ has the information you need.


NYSE:BNO, NYSE:USO


 

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