The pricing of oil

Print edition : December 27, 2013

Crude oil is priced using a market-based formula in which the price of a certain variety of crude oil is set as a differential to a certain marker or reference price. The emergence and expansion of the market for crude oil allowed the development of market referencing pricing of spot crude markets such as spot West Texas Intermediate (WTI), Dated Brent and Dubai.

The price of a barrel of oil is dependent on both its grade—determined by factors such as its specific gravity and its sulphur content—and location.

WTI is a light sweet crude oil used as a benchmark in oil pricing and its properties and production sites makes it deal for being refined in the United States. Brent is also a sweet light crude oil, though not as light and sweet as WTI, and is sourced from the North Sea. Dubai crude has the highest sulphur content among the three and is considered to be heaviest.

(Sweet and sour refers to the level of sulphur, an undesirable impurity. Sweet crude contains less sulphur and sour contains more.)

The WTI and Brent are traded on the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange, London, respectively.