Crude Oil Benchmarks & Their Pricing

CRUDE OIL BENCHMARKS &
THEIR PRICING
WHAT IS CRUDE OIL?

Crude oil is a naturally-occurring substance
found in certain rock formations in the earth.
It is a dark, sticky liquid classified as a
hydrocarbon.
It is a compound containing mainly carbon
and hydrogen.
Crude oil is highly flammable and can be
burned to create energy.
WHAT IS BENCHMARK?
Benchmark oils are used as references while pricing oils.
There are approximately 161 different benchmark oils, of
which the main three West Texas Intermediate, Brent
Crude, and Dubai Crude.
Other well-known blends include the Opec basket used
by OPEC, Tapis Crude which is traded in
Singapore, Bonny Light used in Nigeria,etc.
Crude oil is the most actively traded commodity and is
bought and sold in contracts.
A contract trades in units of 1,000 barrels of oil and
benchmarks help to determine the price of a barrel of oil
in a contract.
WEST TEXAS INTERMEDIATE
WTI is probably the most famous of the bench

mark oils.
It is a light, sweet crude with an API gravity of
39.6 degrees.
That gives it a specific gravity of 0.827, which
means that at 60 degrees Fahrenheit, WTI is
only 8/10 as heavy as water.
It contains 0.24% sulfur and is refined in the
Midwest.
It comes from the Southwestern United States.
BRENT CRUDE
Brent Crude, named after a goose, comes from the North
Sea.
It is a light, sweet crude with an API gravity of 38.06
and a specific gravity of 0.835, making it slightly
heavier than West Texas Intermediate.
The sulfur content is 0.37%.
The price of Brent Crude is used to set prices for roughly
2/3 of the worlds oil.
It is mostly refined in Northwest Europe and is also
called Brent Blend, London Brent, and Brent petroleum.
The Brent field is located in the East Shetland Basin,
halfway between Scotland and Norway.
DUBAI CRUDE
Dubai Crude is light and sour, with an API gravity of
31 degrees and a specific gravity of 0.871.
Its sulfur content is 2%, making it 6 times more sour
than Brent Crude and 8 times more sour than West
Texas Intermediate.
It is generally used for pricing oil that comes from the
Persian Gulf.
Dubai Crude is also known as Fateh. Its importance
comes not only from its quality, but also from the fact
that it was the only freely traded oil from the Middle
East until recently.
CRUDE OIL PRICING

Generally, Crude Oil is sold through a
variety of contract arrangements and in spot
transactions.
Oil is also traded on futures markets but not
generally to supply physical volumes of oil,
more as a mechanism to distribute risk.
These mechanisms play an important role in
providing pricing information to markets.
Pricing of crude oils has become increasingly

transparent from the 1990s onwards through the
use of above marker crudes i.e. :
West Texas Intermediate (WTI USA)
Brent (Europe, Africa and Asia)
Dubai and Oman (Middle East)
The main criteria for a marker crude is

be sold in sufficient volumes to
liquidity (many buyers and sellers)
physical market as well as having
physical qualities of alternative crudes.
for it to
provide
in the
similar
The marker crude should provide pricing information.

WTI does this through the New York Metals Exchange
(NYMEX) as the basis of a futures contract where
trade is equivalent to many hundreds of millions of
barrels per day, even though physical WTI production
is less than 1 million barrels per day.
A futures contract for crude oil is, a promise to deliver
a given quantity of crude oil but this rarely occurs as
participants are more interested in taking a position on
the price of the crude oil.
Futures markets are a financial instrument to distribute
risk among participants with the side effect of
providing transparency on the pricing of crude oil.
Brent offers pricing information based more on the

physical trading of oil through spot trading, and
forward trading but also offers futures trading but not
to the same extent as WTI.
In Asia there is no futures exchange where crude oil is
traded and which would provide pricing information
to the same extent as WTI and Brent.
In Asia the pricing mechanism for say Tapis, a marker
for light sweet crudes in the region, is based on an
independent panel approach where producers, refiners
and traders are asked for information on Tapis crude
trades.
CONCLUSION
Prices of crude oil markers and petroleum
product markers are affected by a myriad of
factors including:
overall supply/demand for crude
supply/demand for petroleum products
freight rates
competition in the crude markets
competition in the regional and domestic
markets for petroleum products.
They all have a role in determining the final

price charged to consumers and the role that
each of these elements plays can change over
time.
It is this very complexity in markets which
makes it very difficult to determine a
theoretical price as part of regulation in markets
as there may be a perception that because the
theoretical price is different from the market
price that the market price is 'not fair' for some
reason.
THANK YOU!

Crude Oil Benchmarks & Their Pricing

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CRUDE OIL BENCHMARKS &

WHAT IS CRUDE OIL?

WEST TEXAS INTERMEDIATE

WTI is probably the most famous of the bench

CRUDE OIL PRICING

Pricing of crude oils has become increasingly

The main criteria for a marker crude is

The marker crude should provide pricing information.

Brent offers pricing information based more on the

They all have a role in determining the final

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