Oil Benchmarks

By Kevin Chambers

Recently, headlines have been dominated by stories concerning the dramatic drop in Oil prices around the world. Reading through news articles or watching CNBC, the interpretation of this drop in prices might be that there is solely one worldwide market for oil.  However, the oil prices discussed by the various news outlets are actually based on benchmarks and not a specific oil company’s price for oil. Just as there are different various types of crude oil found around the world, there are multiple oil benchmarks to track oil prices.

Classifying Oil

Crude oil is the term used for the unrefined liquid that is extracted straight out of the earth. It is oil in its most natural form and unusable to burn as an energy source. To make crude oil into functional gasoline, it needs to go through a refining process. Some crude oil is easier to refine. The first factor is density or thickness. In the oil industry, a “light” oil means it is less dense, and thus, easier to refine. Sulfur concentration is another factor that impacts the ease of a crude oil to refine. “Sweet” crude oil has low sulfur content and is easier to refine; “sour” crude has higher levels of sulfur and is less desirable. The different benchmarks for crude oil reflect these differences in the lightness and sweetness of crude oil and also take into consideration the ease of transportation based on the location the oil is found.
 

The Four Main Benchmarks:

• West Texas Intermediate (WTI): WTI is the main benchmark for oil consumed in the United States. When news outlets are referring to US oil prices (at the pump) they will usually be quoting prices from the WTI. The WTI is also the underlying commodity of the Chicago Mercantile Exchange’s oil future contracts. WTI refers to most of the oil extracted in the United States coming from the Midwest and Gulf Coast and stored at the gigantic storage and pricing facility in Cushing, Oklahoma. WTI is light and sweet, making it very easy to refine. However, due to US law and the land-locked nature of most of the WTI, transportation is very expensive and sale outside of the United States is restricted. These logistical issues effect the price of WTI compared to other benchmarks.
• Brent Crude: Originally, the Brent Crude referred to oil in the Brent Oil Field in the North Sea, but now it encompasses three other major fields as well: Forties, Oseberg, and Ekofisk fields. The Brent is the most widely used benchmark globally. About two-thirds of all crude contracts use the Brent as their standard. The oil from the Brent is slightly less sweet and lighter than the WTI, but is still considered very high grade. It is also considered very easy to transport because all of the supply is in the ocean and is located very close to continental Europe for easy sale and transfer.
• OPEC Basket: The Organization of the Petroleum Exporting Counties (OPEC) is an international organization that attempts to coordinate the price of oil coming from 12 oil producing counties: Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the UAE, and Venezuela. The OPEC basket is the weighted average of the oil prices from the member countries. The OPEC Basket is considered heavier and more sour than both the WTI and Brent. This is the benchmark for most of the oil flowing out of the Middle East to Europe and the US.        
• Dubai Crude: Dubai Crude oil is a lower grade oil from the Persian Gulf. The oil is much more sour and heavier that WTI or Brent equivalent oil. The Dubai Crude, also called the Fateh Crude, is a basket of oils from Dubai, Oman, and Abu Dhabi. This is the benchmark used for Middle Eastern Oil shipped to China and the rest of Asia.

Most of the world’s oil is benchmarked against one of these benchmarks. There are many other oil prices that are tracked, for example Ural Oil (Russian oil), or Bakken Oil (North Dakota fracking oil); however, they are not considered benchmarks for the oil industry as a whole. Because of the dominance of the WTI, Brent, OPEC, and Dubai, oil competing on a global scale trends toward one of these benchmarks. The prices of the various benchmarks change daily due mostly to supply factors. The WTI, Brent, and OPEC have historically traded very closely together. Though, at times the prices have significantly deviated. Especially now, with the recent volatility in oil prices worldwide, it is important to know which price the news outlets are quoting.