Crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons. Petroleum is used mostly for fuel oil and gasoline through the refining process. Generally crude oil is classified as a function of 3 factors:
1. Its origin, the most 2 known sources being West Texas Intermediate (WTI) or Brent. Its location is important because it dictates the transportation costs to the nearest refinery
2. Its API, a measure of gravity. This is important because a light crude produces a higher yield of more valuable gasoline then a heavy crude; and
3. Its sulphur content. A sweet crude (low sulphur content) is more desirable than a sour crude (high sulphur content) as it commands a higher price due to the lower refining costs incurred to meet environmental standards in consuming countries.
Here is a brief outline of the main pricing references for crude as well as an idea of their “liquidity” in the derivatives markets:
· West Texas Intermediate (WTI) is a light, sweet crude oil delivered in Cushing, Oklahoma. Main benchmark for North American oil and the most liquid index worldwide
· Brent is a blend of different oils in the North Sea. The oil is delivered at Sullom Voe in the Shetlands, UK. Oil production from Europe, Africa and Middle East is priced off this benchmark, which is the second most liquid worldwide after WTI
· Others such as Dubai-Oman, Tapis, Minas and the OPEC Reference Basket. The latter is a weighted average of oil blends from various OPEC countries.