What Is Benchmark Crude Oil?

Benchmark crude oil is the petroleum that serves as a pricing reference for other types of oil and oil-based securities. The benchmark makes it easier for traders, investors, analysts, and others to determine the prices of multiple grades of crude oil varieties and blends. The management of many portfolios will consider prices set by the benchmark crude oil.

Key Takeaways

  • Benchmark crude oil is the petroleum that serves as a pricing reference for other types of oil and oil-based securities.
  • Investors can use benchmark crude oil as a gauge to compare and evaluate many other types of crude oil.
  • The benchmark makes it easier for traders, investors, analysts, and others to determine the prices of multiple grades of crude oil varieties and blends.

Understanding Benchmark Crude Oil

Benchmark crude oil serves as a valuable tool for investors and other industry stakeholders needing a set point to serve as a standard of comparison for the evaluation of different varieties of crude oil. Investors can then use these benchmarks as a gauge to compare and evaluate many other types of crude oil.

Investors and analysts rely upon benchmarks as a helpful guide because there are so many different types of crude oil on the market, and investors can quickly become overwhelmed when trying to determine an accurate value to individual varieties. Comparing them all in one big group without any yardsticks for comparison would be difficult. Analysts and investors would struggle to make consistent and accurate comparisons and evaluations. This confusion would cause inaccurate estimations and could lead to unwise decisions.

Benchmark crude oil establishes an initial price reference point. Investors can then evaluate and trade other crude oil varieties using these standards as a baseline. Analysis helps investors hedge oil price risk to mitigate and offset the fluctuations of a volatile market. The industry practice of relying on benchmarks helps provide more stability to the market as a whole. This process also promotes and enables liquidity in the market, as well.

Benchmark Crude Oil Selection

Energy Intelligence Group publishes World Crude Oil Data, considered one of the leading sources of data related to the global crude oil industry and markets related to it. World Crude Oil Data's most recent updates identify nearly 200 varieties of crude oil currently in existence. World Crude Oil Data recently launched an enhanced web data tool. Users of the new web data tool can benchmark specific crude oils against one another. Tool users can also compare several crude oils using a variety of parameters and search for significant criteria, such as region, producer, or benchmark.

Primarily, the benchmark crude follows three main types of oil:

  1. West Texas Intermediate (WTI) has a classification of a light sweet crude with a sulfur content of about 0.24%. The oil is simple to refine into many petroleum products. Production comes from oil fields across the U.S., and most refining happens in the Midwest and Gulf South states.
  2. North Sea Brent Crude also has a description of a light sweet oil due to its low sulfur content. This oil comes from several reserves in the North Sea area. The crude finds usage in the production of gasoline, diesel, heating oil, and several other middle distillate products.
  3. Dubai Crude is classified as a medium sour crude. The use of the Dubai oil as a benchmark is due to its immediate availability. Dubai oil often provides the benchmark for pricing exports to Asia.

While these three crudes see most frequent use as benchmark oil, the production and use of many other oils from around the globe may also happen. The selection of the specific crude oil depends on the export and import market, the specific security priced, and other factors.