How are international crude oil prices determined?

Oil Trading

The commodities market offers ample opportunities for investors, with crude oil being the most popularly traded asset. Known in the industry as ‘liquid-gold’, there is both short term and long-term value in crude oil trading.

Crude oil is one of the most important energy sources in the world. Not only is its value influenced by the large industrial markets of China, India and America, the price of oil can also have an effect on international economic development.

Although crude oil is priced per barrel, there are different types of the commodity available, and therefore come with different pricing characteristics. Let’s explore the leading types of international crude oil and what influences their value.

West Texas Intermediate (WTI) Oil

The spot and futures contract prices of WTI oil on the New York Mercantile Exchange (NYMEX) are used as a benchmark for the price of oil. Extracted in the United States from land wells, it tends to be more expensive to export.

This crude oil is defined as very sweet and light, meaning it has relatively low density and low sulphur content, which makes it ideal for gasoline refining.

NYMEX WTI crude oil contracts trade under the symbol CL on the Chicago Mercantile Exchange. Its futures prices are also included in the Bloomberg Commodity Index and the S&P GSCI commodity index, which are widely followed by treaders and investors.

Brent Oil

Brent oil is also used as a benchmark for the price of oil, in particular Atlantic basin crude oils, and is attributed to two-thirds of all oil pricing. This is based on its value on the Intercontinental Exchange (ICE), primarily in Europe.

It’s extracted from the North Sea (between the Shetland Islands and Norway) using oil rigs in the water. This makes it easy to ship, and therefore transportation costs are lower than that of WTI oil.

Brent oil is also used in the production of gasoline and diesel, due to the fact it is classified as sweet and light, meaning its low in sulphur and has a low density.

This type of oil is traded on the ICE and for its futures, goes under the symbol B. Two other types of Brent crude financial futures can also be found on the NYMEX.

Dubai Crude

As the name suggests, this oil is extracted from Dubai. It is classed as a medium sour crude oil. This means it is high in sulphur. It is a key benchmark as a highly sought-after commodity, as it is a lower grade of crude compared to oil found elsewhere.

The benchmark price is generally used for pricing Persian Guld crude oil that is exported to Asia.

Organisation of Petroleum Exporting Countries (OPEC) Basket

This important oil pricing benchmark is calculated from a weighted average of all the prices of the petroleum blends produced and exported by the countries of the OPEC. It includes a mix of light and heavy crude oil products.

Saudia Arabia is the chief member of OPEC, and the collective members aim to keep the price represented by the OPEC basket between certain upper and lower limits. This is monitored and implemented by an increase or decrease in production.

Due to the influence of supply and demand on the value of oil, the OPEC basket price and its relative production of oil, are key aspects to consider when conducting market analysis.

These four key benchmarks are important in determining the price of oil on the financial markets. However, the individual assets can be subject to volatility, due to the nature of the market, and the impact of several additional factors.

The price of oil in the commodities market can be reflective of the level of consumption or inflation, or an influx in supply. This was apparent during 2020, when demand fell to an all-time low, as COVID-19 restrictions halted all forms of travel — and therefore the demand for oil-related products decreased significantly. This unbalanced the process of supply and demand, and so oil prices reached a ground-breaking negative value. 

Investors will also be aware of any impactful geopolitical events that have the potential to create movement in the market, especially when it comes to the relevant nations where the oil is extracted.

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