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 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 is a valuable tool for investors and industry stakeholders. A benchmark provides a starting point and standard of comparison for evaluating the many different varieties of crude oil. According to World Crude Oil Data, more than 200 varieties of crude oil are actively traded in the market.

Benchmark crude oil establishes an initial price reference. Investors use the benchmark as a baseline when evaluating and trading individual crude oil varieties. 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.

Benchmark Crude Oil Selection

Benchmark crude oil primarily tracks these three main types of oil:

West Texas Intermediate (WTI) is classified as a light sweet crude with a sulfur content of 0.42% or less by weight. The oil is simple to refine into many petroleum products. Production comes from oil fields across the United States, and most refining happens in the Midwest and Gulf South states.

North Sea Brent Crude is also described as a light sweet oil due to its low sulfur content. This oil comes from reserves in the North Sea. The crude finds usage in the production of gasoline, diesel, heating oil, and several other middle distillate products.

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 serve as the benchmark for the crude oil industry, many other types of oil from around the world are produced and refined. The selection of a specific crude oil depends on the export and import market, the specific security priced, and other factors.