Crude Oil – the Different Benchmarks for Traders and Investors

Transactions in crude oil are carried out all over the world, and there can be a bewildering variety of contracts and vehicles at different prices, so it can be confusing for traders looking for a suitable benchmark. In addition, each type of vehicle has many different options and futures with various expiry dates, so this brief paper describes the main vehicles for CFD traders.

The two main crude oils which are either traded themselves or whose prices are reflected in other types of crude oil are West Texas Intermediate and Brent.

Types of crude

The main differences in the type of extracted crude relate to viscosity and sulphur content. Viscosity is measured by API gravity, which is a measure of how heavy or light the petroleum liquid is compared to water. The higher viscous crudes are called "heavy", and those with a lower API figure are classed as “light”.

Those crudes with higher sulphur content are called "sour", and the lower sulphurs are “sweet”.

The heavier and more sour the extracted crude is, the more difficult and expensive it is to turn into usable refined products, so the benchmarks usually chosen are for light, sweet crudes.

Typically, there is a price differential between light sweet crudes and heavier sour issues, but this has risen in recent years as a result of the decrease in the supply of light, sweet crude, which means. Higher quality crude supplies are always consumed first, and the world is now increasingly reliant on a lower quality product.

Data from OPEC suggests that global production of light, sweet crude actually declined between 2000 and 2004, so this might be seen as the beginning of the ‘peak oil’ scenario.

West Texas Intermediate (WTI)

This is a major benchmark for oil traders and is the underlying commodity of the New York Mercantile Exchange’s oil futures contracts. Although WTI has traditionally had a higher price than that of Brent crude, recently this has contracted and even reversed at times.

WTI is a light crude and with an API gravity of 39.6 degrees it is lighter than Brent Crude. It contains about 0.24% sulphur, and it is also sweeter than Brent. It is of very high quality and is excellent for refining a larger portion of gasoline.

Although the production of WTI crude oil is on the decline, it still is the major benchmark of crude oil in the Americas. WTI has generally been priced at about a $5 to $6 per-barrel premium to the OPEC Basket price (see below) and about $1 to $2 per-barrel premium to Brent, although on a daily basis the pricing relationships between these can vary greatly.

Our analysis of crude oil at Blue Index uses WTI as the benchmark for US crude prices.

Brent

Brent, or actually Brent Blend, is a combination of crude oil from 15 different oil fields in the Brent and Ninian systems in the North Sea. Its API gravity is 38.3 degrees, slightly heavier than WTI but still light, and it contains about 0.37% of sulphur, again sweet but less so than WTI.

Brent blend is ideal for making gasoline and middle distillates, both of which are consumed in large quantities in the North Western Europe, where it is normally refined. There are times though when the arbitrage between Brent and other crude oils makes it worth exporting. Brent has been known to be refined in the United States (typically the East Coast or the Gulf Coast) or the Mediterranean region.

Brent blend production is also in decline, but it remains the major benchmark for other crude oils in Europe or Africa. It is generally priced at about a $4 per-barrel premium to the OPEC Basket price or about a $1 to $2 per-barrel discount to WTI, although on a daily basis the pricing relationships can vary greatly.

NYMEX Futures

The NYMEX (New York Mercantile Exchange) futures price for crude oil, which is another major benchmark, represents on a per barrel basis the market value of a futures contract to either buy or sell 1,000 barrels of WTI or some other light, sweet crude oil at a specified time.

Although most NYMEX crude oil contracts are never executed for physical delivery, the NYMEX market supplies important price information to US buyers and sellers of crude oil in the US and around the world, making WTI the benchmark for many different crude oils, especially in the Americas.

Typically, the NYMEX futures prices tracks very closely the WTI spot price as above, although since the NYMEX futures contract for a given month expires 3 days before WTI spot trading for the same month ceases, there can be a period in which the difference between the NYMEX futures price and the WTI spot price widens noticeably.

OPEC Basket Price

For more detailed crude oil pricing, OPEC collects pricing data on a basket of seven crude oils, including: Algeria's Saharan Blend, Indonesia's Minas, Nigeria's Bonny Light, Saudi Arabia's Arab Light, Dubai's Fateh, Venezuela's Tia Juana Light, and Mexico's Isthmus (a non-OPEC crude oil).

OPEC uses the price of this basket to monitor world oil market conditions. Because WTI crude oil is a very light, sweet crude, it is generally more expensive than the OPEC basket, which is an average of light sweet crude oils such as Algeria's Saharan Blend and heavier sour crude oils, such as Dubai's Fateh. Brent is also lighter, sweeter, and more expensive than the OPEC basket, although less so than WTI.

Imported Refiner Acquisition Cost (IRAC)

The Imported Refiner Acquisition Cost is a volume-weighted average price of all crude oils imported into the US over a specified period. The US imports more types of crude oil than anywhere else and it is thought this may represent the truest world oil price among all published crude oil prices.

The IRAC is also usually similar to the OPEC Basket price, so it too is typically about $6 to $8 per barrel less than the WTI spot price and about $5 to $6 per barrel less than the Brent price. But because the IRAC is not reported by EIA (the US Energy Information Administration) until nearly 2 months after the end of the measured month, it is not a particularly timely measure current prices, so is often used for longer term analysis.

Although EIA is generally the only organization that uses the IRAC, it is used by EIA as the world oil price in its publications, including the monthly Short-Term Energy Outlook, as well as the Annual Energy Outlook and International Energy Outlook, also released annually, and these provide an annual forecast for approximately 20 years in the future.