Crude Oil Benchmarks

Crude Oil Benchmarks

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Created in the 1980s, Crude oil benchmarks produce a standard by which other crude oil can be compared and judged. Not all oil is the same, and the quality of oil can be figured out by judging it compared to the regular benchmarks, which are sometimes called oil markers. The kind of oil is important because it influences how simple it is to extract the products, such as gasoline and diesel fuel, that are refined from the raw oil.

There exist a few key characteristics of crude oil that can determine its worth - the weight and density (light/heavy), and how "sweet" it is. Now "sweet" may need some explaining. Oil is called sweet if it has a low sulfur composition, which is set as less than 0.5%; if not it is labeled "sour ".

In the US, the benchmark for oil is called West Texas Intermediate (WTI), and globally the benchmark for around 2/3rds of crude oil is called Brent Blend crude, which comes from the North Sea off the coast of the United Kingdom. It's not quite as light or sweet as WTI, but fairly close and a solid foundation for distilling gasoline and other light oils.

These light and sweet oils are simpler and less pricey than other crude oils for refining to create completed products. For that reason they are worth much more. Putting a price on crude oil for the most part for the 161 identifiable blends is compared back to these benchmarks, while others oils are priced at a discount or a premium to them.

Yet, these benchmark oils do have their own difficulties. In 2011 the Financial Times informed that WTI was a tad removed from the worldwide oil market, with delivery in landlocked Oklahoma. The major players in oil regulation, the International Energy Agency, the US Department of Energy, and Saudi Arabia, have all second-guessed its role. With all that in mind, it is still the world's most liquid oil futures contract.

What's more is that the benchmark of Brent Blend has been put into question, because there is rigid production which means a fewer number of cargo can impact the price, creating more volatility in the market. As a result, the price may not at times mirror the actual global supply and demand in the oil market entirely.

Another option that could possibly become a benchmark is Omani crude on the Dubai Mercantile Exchange. This was created recently in 2007 but is already one of the popular alternatives, and would also give a Middle East benchmark. The benchmark is a light sour oil, with a sulfur content of around 2%, and arguably the expanding ability to refine sour oil signifies that maybe it should be represented in the benchmark prices.

The more heavy crude oil is becoming more of a presence in the markets, as the oil extracted off the US Gulf Coast, which is medium sour crude, is adding to the supply. The Argus Sour Crude Index (ASCI), representing a blend of three Gulf Coast oils was launched in 2009, and is an alternative being considered for a benchmark that more accurately reflects the type of oil being traded in the world today.

About the Author:
Bryce Hanson is a crude oil expert. For more articles on how to trade crude oil futures visit http://tradecrudeoil.net



Article Originally Published On: http://www.articlesnatch.com


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