When they ask if you want “light sweet” in the oil trading business, they’re not talking about a coffee break.
Light sweet is a generic term that can be used for a variety of crude oils traded on the New York Mercantile Exchange, a leading petroleum market, although traders often erroneously refer to the mix as West Texas Intermediate, or WTI, the benchmark U.S. crude.
The Mercantile Exchange has sought to change this entrenched habit, partly by insisting that traders use “light sweet” instead of WTI. But old ways die hard.
“It’s WTI,” said John Lichtblau, president of the Petroleum Industry Research Foundation in New York. “WTI is the oil traded on the Merc. Practically speaking, it is WTI.”
Advised of the Merc’s position on what the oil should be called, Lichtblau said any label used by the exchange is “sort of irrelevant,” because traders in that market are only speculating on which direction oil prices will go.
Like traders in other futures markets, oil traders rarely take delivery of the actual oil but gamble on its price by buying and selling contracts for delivery in upcoming months.
These oil futures contracts are commonly called “paper” barrels. Real oil, on the other hand, comes in what the industry calls “wet” barrels.
Regardless of what they’re called, Merc traders have been buying and selling barrels of oil since 1983, when the exchange first offered a market in crude oil futures.
Initially, the Merc listed 13 grades that it classified as light sweet crude. The menu is now down to seven domestics and three foreign oils.
Merc officials say the most commonly traded light sweet crude was WTI. Eventually, the contract for other crudes also became known as WTI.
Confusion over what is sold has led to problems, Merc officials say. Some buyers who thought they were getting WTI have discovered they were getting a different grade.
The errors have become a bigger headache for the Merc officials recently, as the Iraqi invasion of Kuwait sent oil prices into wild gyrations that thrust the Merc into a larger-than-usual public spotlight.
In an effort to clear up any misunderstanding, the Merc sent members a memo this week asking that they refer to light sweet crude instead of WTI.
WTI has for years been used as a reference point for measuring other crudes, partly because it once was the most important grade of crude in the lower 48 states, extracted from the Permian Basin in West Texas. But the industry’s shifting exploration to other areas has made other grades just as prominent.
“Today, Alaskan North Slope crude is the most important,” said Bernard Picchi, a Salomon Bros. Inc. managing director who follows domestic oils. “A lot of people think WTI is losing whatever relevance it once had in the industry, because we’re just running out of the stuff.”
The foreign oils that can be included in a Merc contract are Brent Blend, Bonny Light and Oseberg. The domestic crudes, other than WTI, are Mid Continent Sweet, Low Sweet Mix (Scurry Snyder), New Mexican Sweet, North Texas Sweet, Oklahoma Sweet and South Texas Sweet.
“Sweet” refers to a crude’s low sulfur content, which is desirable because it’s less polluting and more cheaply refinable than so-called high-sulfur sour grades.
“Light” refers to a higher proportion of hydrogen compared to carbon, with “heavy” oil often requiring an infusion of hydrogen before it can be refined, Picchi said.