Heavy oil differential refers to the difference in weight, or gravity, of oil, and secondly to the resulting price differentials. The heavy oil differential affects oil producers because it determines the market price they can obtain for the oil they produce. It also logically inclines oil producers to concentrate their exploration and drilling efforts in areas most likely to contain lighter oil.
Heavier crude oil, as compared to lighter, less dense crude oil, is more viscous. It is more difficult for the oil to flow through pipelines from oil production wells to storage reservoirs or shipping points. Heavy crude oil is differentiated from light crude oil by its specific gravity. The American Petroleum Institute sets gravity standards and currently defines heavy oil as any oil with an API gravity of less than 20.
Weight and sweetness, which refers to the amount of sulfur content present in oil, are two main pricing differential points for crude oil.
West Texas Intermediate (WTI) crude oil is a preferred grade of crude oil because it is one of the lightest oils produced, significantly lighter than Canadian, North Sea Brent crude oil or Saudi Arabian oil. It is also one of the sweetest crude oils, meaning it is more pure, containing relatively less sulfur content. Lighter, sweeter oil is more easily transported through pipelines and is more easily refined into petroleum products.
Price differentials between lighter and heavier oils are significant. For example, as of 2015, a $1 per barrel price increase in WTI crude oil resulted in only a 59 cents per barrel price increase for Brent crude oil.