According to the US Energy Information Administration (EIA), when energy analysts and the media discuss the price of crude oil, they are typically referring to one of a small group of specific types of crude oil that are widely and actively bought and sold. The use of such benchmark crudes makes it easier for buyers and sellers to price the variety of crudes that are produced around the world.
The most widely used benchmarks are associated with crude oil that has four common qualities: stable and ample production; a transparent, free flowing market located in a geopolitically and financially stable region to encourage market interactions; adequate storage to encourage market development; and/or delivery points at locations suitable for trade with other market hubs, enabling arbitrage (profit opportunities) so that prices reflect global supply and demand.
Other types of crude oil can be compared to these benchmarks by an agreed upon differential. The agreed upon differential takes into account a number of factors, including quality characteristics such as API gravity (density) or sulfur content, transportation costs from production areas to refineries, and regional and global supply and demand conditions, including refinery utilisation.
Three of the most significant benchmarks in global crude oil markets are Brent, West Texas Intermediate (WTI), and Dubai/Oman.
Brent, which is the most widely used global crude oil benchmark, includes four separate light, sweet crude streams that are produced in the North Sea: Brent and Forties (produced offshore UK) and Ekofisk and Oseberg (produced offshore Norway). In 2013, Brent crude oil loadings averaged 0.86 million bpd, representing approximately 1% of total world crude oil production of 76 million bpd. Brent is used to price light, sweet crude oil that is produced and traded not only in Europe, the Mediterranean, and Africa, but also in Australia and some countries in Asia.
West Texas Intermediate (WTI) is a light, sweet crude oil produced in the US that is priced at the crude oil trading hub of Cushing, Oklahoma. WTI is used as a benchmark for other types of crude produced in the US, such as Mars, a medium, sour crude produced in the Gulf of Mexico, and Bakken, a light, sweet crude produced in North Dakota. WTI is also used as a benchmark for imported crude oil that is produced in Canada, Mexico, and South America.
Dubai/Oman is a third major benchmark crude. The prices of Dubai and Oman crudes, both of which are medium and sour are often averaged to create a benchmark that is typically used to price crude oil produced in the Middle East and exported to Asian markets. Dubai crude oil production has steadily declined for more than two decades, and in 2013 was only 34 000 bpd. As a result, Oman crude oil, which reached 0.94 million bpd of production in 2013, has been used to support the continued use of Dubai crude as a benchmark. Saudi Arabia’s state owned oil company, Saudi Aramco, uses the Dubai/Oman benchmark when determining the price of its crude oil sold for delivery to Asia.
Adapted from a press release by Emma McAleavey.
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