What is a crude oil benchmark?
In reality, oils come with different densities (API gravity) and sulfur content which makes them more or less desired by consuming nations and businesses. Hence different oils end up with different market values. Prices of crude oil are also determined by the dynamics of global supply and demand as well as regional geopolitical and economic conditions. To reflect all these considerations, traders use reference baskets of oils also called benchmarks or markers. There are over 160 different benchmarks around the world. There is usually a spread between the markers stemming from differences in transportation costs and features of regional markets.
Below we discuss the characteristics of the most popular markers.
Brent crude (London Brent)
Brent, the most widely used benchmark, is historically based on oil extracted from British and Norwegian fields in the North Sea. It is named after a bird because of a policy of Shell UK Exploration which developed fields in this region. This benchmark is used for pricing of light sweet crude (low density, low sulfur content) and serves as direct or indirect reference for over 60% of global crude oil sales. It is primarily used in Europe, Africa, the Mediterranean, Australia and some Asian countries, according to the EIA. Typically, the minimal trading volume is 1000 barrels per contract.
The Brent crude futures contract was introduced in 1988, when output from the North Sea fields was on the rise. It has gained global coverage ever since. Today, oil from the Brent field, located between Scotland and Norway, represents less than 0.1% of the global supply and traders consider adding other oils from locations outside Europe.
West Texas Intermediate (WTI)
West Texas Intermediate is light sweet crude known as the American benchmark. It is produced in the US, priced at the trading hub in Cushing, Oklahoma and used as reference for pricing of various domestic (Gulf of Mexico, North Dakota) and imported oils (Canada, Latin America). WTI is usually refined in the Midwest.
Unlike Brent which is based on off-shore production and seaborne deliveries, WTI is a market physically based on pipeline connections which pass through the storage facilities at Cushing.
Dubai/Oman (Middle East crude)
This benchmark is an average of the price of Dubai and Oman crudes (both light to medium and sour). It is used for pricing of oil coming from the Persian Gulf and the Middle East and bound for markets in Asia. Initially, the marker was based on Dubai oil but as production there steadily declined output from Oman fields was added to support the further use of the benchmark.
The Dubai/Oman oil is traded on the Tokyo Commodity Exchange under the acronym TOCOM. Unlike Brent and WTI which are sold and bought in US Dollars per barrel, this benchmark uses Japanese yen (JPY) per kiloliter as a main unit of exchange.
OPEC Reference Basket
This is a weighted average of crude oil streams delivered from the members of the Organization of Petroleum Exporting Countries (OPEC), the world’s oil cartel. It is calculated by the OPEC Secretariat in Vienna and reflects the output and exports of each state.The OPEC Reference Basket (ORB) currently includes 12 different oils: Saharan Blend (Algeria), Girassol (Angola), Oriente (Ecuador), Iran Heavy (Iran), Basra Light (Iraq), Kuwait Export (Kuwait), Es Sider (Libya), Bonny Light (Nigeria), Qatar Marine (Qatar), Arab Light (Saudi Arabia), Murban (UAE) and Merey (Venezuela).
By setting output targets, OPEC has a serious impact on global oil supply and hence on international prices. Member countries of the cartel extract around 40% of the oil in the world.
The chart below shows the annual average values for Brent, WTI and the OPEC basket. The average for the last year is based on the weeks that have already passed in that year.
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