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 or crude oil markers make 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 benchmark prices set by the benchmark crude.

Key Takeaways

  • Benchmark crude oil is the petroleum used as a pricing reference for other types of oil-based securities and oil itself.
  • Investors use it as a gauge to compare and evaluate 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.
  • Benchmark crude oil primarily tracks these three main types of oil. They are West Texas Intermediate, Dubai crude, and North Sea Brent crude.

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 (the most recent figures as of March 2021), 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.

The WTI is the benchmark oil for North America and the New York Mercantile Exchange lists futures of WTI crude oil.

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 creation of gasoline, diesel, heating oil, and several other middle distillate products. These are the products used by most households and individuals.

Dubai Crude is classified as a medium sour crude by the crude oil industry. The use of Dubai oil as a benchmark is due to its immediate availability. Dubai oil often provides the benchmark for pricing exports to Asia.

Special Considerations

While these three crudes listed above 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 pricing, and other factors.

World and natural events can impact the oil market. Political instability, extreme weather, and global health pandemics are all examples of events that may influence the price and availability of crude oil.