EME 801
Energy Markets, Policy, and Regulation

Regional Pricing of Crude Oil


While the market for oil is global in reach, trade has clustered itself into several primary regions. This has happened despite shipping costs that are generally low (only a few dollars per barrel) and the ease with which oil cargoes can be directed and redirected towards the highest-priced buyers (in financial terms, oil is "fungible"). Nevertheless, prices in these regions tend to move in tandem.

One reason for regional pricing of crude oil is that it is a heterogeneous commodity - not all crude oils are alike. Some oil can be extracted at a cost of a few dollars per barrel, and flows like water (it would look like Coca-Cola coming out of the ground). Other oil requires sophisticated equipment, techniques and processing to extract, and is thick as tar, requiring special methods to transport it to the refinery (and to refine into saleable petroleum products). In general, oil with a low viscosity is referred to as "light," while thicker, higher-viscosity crude oils are referred to as "heavy." Light oils are generally valued higher than heavy oils. The viscosity of crude oil is measured on a scale known as the API gravity (API stands for "American Petroleum Institute"). The API gravity scale measures how heavy or light a crude oil is, relative to water (thus the terms heavy and light oil). The API gravity of a crude oil is measured by taking its specific gravity (density relative to water), and calculating:

API Gravity = (141.5 ÷ Specific Gravity) - 131.5.

Sulfur content is another important determinant of value; the lower the sulfur content the better. So-called "sweet" oils are low in sulfur, while "sour" oils have a higher sulfur content. There are some differences in crude oil quality among the major trading regions. Pricing of heterogeneous commodities often involves establishing a benchmark or "marker" price that is used to track general price movements. Pricing in any particular transaction is based on the marker price, with adjustments for location and quality. Below are some brief descriptions of some of the major global benchmark oil streams, and the Energy Information Administration has a very nice article on the most important global marker prices. The first two, West Texas Intermediate (WTI) and Brent, are the most important benchmark oil prices in the world.

  • West Texas Intermediate (WTI) is a light crude oil that is primarily representative of the U.S. market. It is a "light sweet" oil, meaning that it has low density (high API gravity of around 40) and a low sulfur content.
  • Brent is a blend of light sweet crude oils from the North Sea, off the coast of the United Kingdom. Its API gravity is around 38 and it has a somewhat higher sulfur content than WTI. Still, in terms of quality, WTI and Brent are largely comparable.
  • Fateh is a crude oil stream from the emirate of Dubai (which is why it is sometimes simply called "Dubai Crude"). Fateh has an API gravity of around 31, making it a denser crude oil than either WTI or Brent. Fateh is also classified as a "sour" oil for having a higher sulfur content than WTI or Brent. The importance of Fateh as a benchmark oil price is that it is representative of crude oil shipments from the Middle East to Asia.
  • Bonny Light is a light sweet crude oil stream from Nigeria. It serves as a benchmark for African crude oils because its low density and sulfur content make it comparable to WTI and Brent (and, indeed, the major source of demand for Bonny Light has historically been refineries in Europe and the U.S.).
  • Urals is a heavy (low API gravity) and sour crude oil blend from Russia. It serves as a benchmark for oil exports from Russia.