Oil benchmarks: Why crude prices aren’t one-size-fits-all
When geopolitical tensions put oil-producing countries in the headlines, oil and oil prices tend to be treated as a single, uniform commodity. In reality, crude oil markets are far more nuanced. Crude oil comes in many forms, varying in quality, composition, and end use. And although oil prices are correlated across the globe, they are not identical. Prices differ by benchmark, region, and the specific grade of oil being traded.
To understand how such developments affect the oil markets, it helps to begin with a basic but often overlooked point: Crude oil is not a single commodity. It is a collection of different products, priced through a system of benchmarks that reflect geography, quality, and market structure. These differences reflect not just where oil comes from, but also its physical characteristics—commonly described using terms such as light or heavy and sweet or sour.
Key Points
- Oil benchmarks are price references, not physical oil.
- There are different grades of physical oil, each better suited for particular end products.
- Benchmarks help anchor prices during periods of volatility.
How global and regional oil benchmarks work
Crude oil benchmarks are price references organized by region. They reflect where oil is produced, how it moves to market, and who ultimately buys it. But among these benchmarks, only three are widely considered global benchmarks, meaning they support deep, liquid futures markets used for pricing, hedging, and price discovery worldwide.
- Brent crude. Derived from North Sea oil fields, Brent is the most commonly used global benchmark and generally reflects light, sweet crude traded across the Atlantic Basin and widely used for waterborne oil pricing.
- West Texas Intermediate (WTI). This is the North American benchmark, priced at Cushing, Oklahoma, a major inland storage and delivery hub. This benchmark represents light, sweet crude produced primarily in the United States.
- Dubai/Oman. Separate benchmarks that are often averaged, they reflect medium-light to medium-sour crude exported from the Middle East and priced primarily into Asian markets.
There are several other regional (non-global) benchmarks that you might hear about. Urals oil is Russia’s primary export grade, which is typically priced at a differential to Brent. The Argus Sour Price refers to assessment-based benchmarks for heavy sour crude, including the U.S. Gulf Coast (Argus Sour Crude Index, or ASCI) and Europe (Argus Brent Sour, or ABS).
Benchmarks are where oil price references start. The actual pricing of physical oil between producers, refiners, and traders depends on the grade of the oil itself.
Understanding differences in grade
The differences in crude oil grade are typically grouped into two categories: density and sulfur content.
Sweet vs. sour crude
- Sweet crude contains relatively low levels of sulfur. It is generally easier and less expensive to refine because it requires less desulfurization and is less corrosive to refinery equipment.
- Sour crude contains higher sulfur levels and typically requires more intensive processing. Refining sour crude involves additional equipment, higher operating costs, and greater maintenance demands because sulfur compounds can cause corrosion and produce toxic byproducts such as hydrogen sulfide.
Because sulfur directly affects refining complexity and cost, sweet crude oils often trade at a premium to sour crudes.
Light vs. heavy crude
Crude oil density is measured using the American Petroleum Institute (API) gravity scale, an industry standard that helps classify oils as lighter or heavier.
- Light crude has lower density and higher API gravity. It flows more easily and tends to yield a higher proportion of valuable refined products such as gasoline, jet fuel, and diesel.
- Heavy crude is denser and more viscous, with lower API gravity. It contains larger and more complex hydrocarbon molecules and thus is more difficult and costly to refine into the same fuels as lighter crude.
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Why crude quality matters for pricing
Crude oils are often described using combinations of these characteristics—such as light sweet or heavy sour. These combinations matter because refining costs, product yields, and equipment requirements vary widely across grades.
As a result, light, sweet crude oils typically trade at a premium, while heavy, sour crudes usually trade at a discount relative to major benchmarks. Those premiums and discounts can widen significantly during periods of market stress or supply disruption.
Why premiums and discounts blow out during crises
Depending on the nature of the crisis, the price of oil can rise or fall sharply.
- When supply is disrupted during periods of sustained or rising demand, prices tend to increase. Geopolitical conflicts, sanctions, or infrastructure outages can constrain flows of certain crude grades, pushing benchmarks and quality differentials higher as refiners compete for suitable substitutes.
- If the crisis leads to a collapse in demand, such as during the 2007–08 financial crisis and the COVID-19 lockdowns, prices can fall dramatically. In April 2020, the collapse in fuel demand combined with full storage at Cushing, Oklahoma, drove near-term WTI crude futures into negative territory as traders paid to avoid taking physical delivery.
In the end, it all comes down to supply and demand—filtered through crude quality, geography, and market structure.
The bottom line
Global crude oil markets are fragmented by geography, politics, and crude quality. Production is regionally concentrated, sensitive to geopolitical pressures, and yields oil grades that vary in suitability for different refining processes and end products. Benchmarks matter because they help bridge this fragmentation by providing transparent price references, allowing global market participants to better assess value, forecast fundamental conditions, and hedge price movements.
So the next time oil prices move on geopolitical headlines, remember that markets are reacting to very specific and nuanced factors across a fragmented global system. There is no single “oil” in the abstract. There are several types of oil, and their movements will vary depending on where they’re produced, how they’re traded, and how they’re used in the global economy.