WTI Cushing

WTI Cushing refers to the benchmark grade of U.S. crude oil, West Texas Intermediate (WTI), as priced for physical delivery at the major storage hub in Cushing, Oklahoma. WTI is a high-quality “light, sweet” crude, meaning it has a low density and low sulfur content, which makes it relatively easy and inexpensive to refine into high-demand products like gasoline. Cushing, a small city in Oklahoma, is anything but small in the world of energy; it's the “Pipeline Crossroads of the World,” a massive nexus of pipelines and commercial storage tanks. This specific combination—a high-quality oil (WTI) and a major, landlocked delivery point (Cushing)—serves as the underlying physical commodity for the world's most-traded oil futures contract on the New York Mercantile Exchange (NYMEX). So, when you hear a news anchor announce “the price of oil,” they are almost always quoting the price of the near-term WTI Cushing futures contract.

It might seem odd that a small, landlocked city dictates the price of a globally vital commodity. The reason is infrastructure. Think of Cushing as the Grand Central Station or the Frankfurt Airport of North American oil.

• Unparalleled Connectivity: Dozens of pipelines converge on Cushing, bringing in crude from oil fields across Texas, the Dakotas, and even Canada. From there, other pipelines carry it out to refineries across the American Midwest and Gulf Coast.
• Massive Storage: Cushing is home to one of the largest commercial oil storage facilities in the world, with tank farms capable of holding tens of millions of barrels of oil. This storage capacity is critical because the NYMEX futures contract is for the physical delivery of oil. The amount of oil in storage at Cushing is a key variable influencing the price.

This robust network of pipelines and storage tanks makes Cushing the most logical and reliable point for buyers and sellers to exchange physical oil, and therefore the perfect settlement point for a financial contract based on that oil.

The “price of WTI” is not just a spot price for a barrel today; it's the price of a futures contract for delivery next month. A single WTI Cushing futures contract, traded on the NYMEX (a part of the CME Group), represents a promise to buy or sell 1,000 barrels of WTI crude, to be delivered to a storage facility in Cushing, at a predetermined price on a future date. This price serves as a primary global benchmark. Its main rival is Brent Crude, which is priced based on oil extracted from the North Sea. While the two prices generally move in tandem, the difference between them (known as the WTI-Brent spread) can reveal important information.

1. WTI Cushing is more sensitive to the supply and demand dynamics within North America.
2. Brent Crude is more influenced by global geopolitical events and international shipping costs, as it is seaborne.

For a value investor, directly trading WTI Cushing futures is a dangerous game. The market is notoriously volatile, driven by geopolitics, OPEC decisions, and immense speculation. It's a speculator's paradise, not a long-term investor's home.

The risk of playing in this market was laid bare in April 2020. As the COVID-19 pandemic crushed demand for fuel, the storage tanks at Cushing filled to the brim. Traders who held futures contracts that were about to expire realized there was simply no physical space to put the oil they were obligated to accept. This created a panic, and for the first time in history, the price of WTI Cushing futures fell into negative territory (to nearly -$40 a barrel). Sellers were literally paying buyers to take the oil off their hands. This event is a stark reminder that futures are tied to a physical reality, and for the unprepared, the losses can be catastrophic.

Instead of gambling on its price, a savvy investor uses WTI Cushing as a powerful analytical tool to find value elsewhere.

• Analyzing Oil & Gas Companies: The price of oil is the primary driver of revenue for companies like ExxonMobil and Chevron. A value investor's goal is not to predict the price of oil but to find companies that are well-managed, have low production costs, and can remain profitable even when WTI Cushing prices are low. A company that needs $80/barrel oil to break even is far riskier than one that is profitable at $40/barrel. The latter has a much larger margin of safety.
• Analyzing Other Industries: The price of oil is a critical cost for a huge swath of the economy.
  1. Beneficiaries of Low Prices: Airlines (Southwest Airlines), trucking and logistics firms (FedEx), and cruise lines see their profits swell when their largest expense—fuel—is cheap.
  2. Victims of High Prices: Those same industries suffer when oil prices are high. This can also be a headwind for consumers, as it leaves them with less discretionary income to spend elsewhere.
• Monitoring the Economy: WTI Cushing is a key inflation barometer. Persistently high oil prices often lead to higher inflation across the board, affecting interest rates, corporate profits, and overall economic growth. Watching its trend can provide valuable context for your broader investment strategy.