Crude oil is one of the world´s most important commodities, and the price of crude oil can both be impacted by – and impact – the broader economy. Investors and speculators that wish to gain exposure to oil prices can do so through a variety of products in addition to the spot market, such as futures contracts, exchange-traded funds (ETFs), exchange-traded commodities (ETCs) and contracts for difference (CFDs).
Understanding the development
The the late 1800s and early 1900s, the United States was one of the main crude oil producers in the world, and also a trailblazer when it came to developing better equipment and techniques for oil extraction, oil prospecting and oil processing. During the second half of the 1900s, U.S. oil production fell while U.S. consumption rose, turning the country into an net-importer of oil and oil products. In the 21st century, new trends are emerging, and in 2021 (during the later stage of the Covid19 pandemic) crude oil net imports to the U.S. were at the second-lowest annual level since 1985.
Founded in 1960, the Organization of the Petroleum Exporting Countries (OPEC) has had a major influence on the oil prices. One of the stated goals of this cartel – comprised of some of the world´s largest oil producers and holders of known oil reserves – is to keep the price of oil stable on the world market in order to avoid fluctuations that could be harmful to oil selling countries. OPEC was founded by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Later, Algeria, Angola, Congo, Equatorial Guinea, Gabon, Libya, Nigeria, and the United Arab Emirates have joined the organization.
OPEC´s influence has decreased notably in the 21st century, largely due to the development of efficient hydro-fracturing (“fracking”) techniques which has created a second energy boom in the United States. Non-fossil sources of energy are also taking ground, such as wind power, solar power and hydro power.
WTI Crude and Brent Crude
There are two major oil prices that are watched closely by oil speculators: the world market price of WTI crude oil and the world market price of Brent crude oil.
In the United States, the benchmark for oil futures is West Texas Intermediate (WTI) crude oil, which is traded on the New York Mercantile Exchange (Nymex).
In Europe, Africa and the Middle East, the benchmark for oil futures is North Sea Brent crude oil, which is traded on the Intercontinental Exchange (ICE).
Historically, the two contracts have typically moved somewhat in unison, but WTI tends to be more sensitive to the U.S. economic developments than Brent.
West Texas Intermediate (WTI) crude oil is a specific grade of crude oil. It does not contain a lot of sulphur (between 0.24% and 0.34%) and is therefore known as a sweet oil. It has a low density and is therefore also known as a light oil.
WTI is a light, sweet high-quality oil that is easily refined.
Even though it is called West Texas Intermediate, it is not exclusively sourced from West Texas (although most of it does come from inland Texas).
North Sea Brent crude oil is a blended crude oil extracted from the North Sea. Just like the WTI oil, it is classified as a light and sweet crude oil and it is easily refined, although it is not as light and sweet as the WTI oil.
The Brent crude oil comes from the large North Sea deposit. Examples of active oil fields there are the Brent, Oseberg, Ekofisk, Forties, and Ninian systems. Oil was discovered there in 1859, but commercial exploration did not start until the mid-1960s. Commercial and political interest in extracting oil in the North Sea grew due to the OPEC oil crisis of the 1970s, which – coupled with the high quality of the North Sea oil and the political stability of the region – made North Sea oil production a tempting option.
At the time of exploration, Shell UK had a tradition of naming production oil fields after birds. The Brent oil field is named after the Brent goose (Branta bernicla).