Crude Oil vs. Brent Crude Oil
Crude Oil or “Black Gold” as it is called, has gained a lot of importance in an economy. Changes in Crude oil prices impact the stock market as well as the currency of the country. Prices of crude oil are globally determined. There are refineries to process crude oil in India. However, the Crude oil production in India is minimal. Hence, crude oil is a significant import of India, and rising crude oil prices adversely impact the economy, vice versa. Crude Oil vs. Brent Crude Oil
What is Crude Oil?
Crude Oil is an unrefined petroleum product comprising hydrocarbon deposits and organic materials. It is a natural and non-renewable resource. Hence it cannot be reproduced and has a limited resource. Crude oil is a type of fossil fuel. It is further refined into diesel, gasoline, and petroleum products. Crude oil is found in reservoirs located underground. Crude oil is a liquid with yellowish black color.
How Crude oil is formed?
Crude Oil is formed at the bottom of the sea. The remains of plants and dead small animals fall at the bottom of the sea. They get covered with mud. With time, more and more sediments get deposited. At the same time, with increasing temperature and pressure, the rock is formed with fossil fuels.
Crude Oil v/s Petroleum
Many times, we use the terms”Crude Oil” and “Petroleum” interchangeably. Petroleum is a broad category that includes both crude oil as well as petroleum products. Crude oil is found in a liquid state underground and remains liquid when brought on the surface. Whereas Petroleum products are formed by processing crude oil along with other liquids/chemicals in the refineries.
Types of Crude Oil Benchmarks
There are primarily three types of Crude oils traded internationally. These are classified based on the locations of the crude. These are also called as benchmark crude as it serves as a reference price for buying and selling of crude.
WTI Crude Oil – West Texas Intermediate (WTI) crude oil is a relatively low-density oil with low sulfur content. The major trading hub of WTI crude oil is in Oklahoma, in the USA. NYMEX or the New York Mercantile Exchange trades in different types of WTI crude contracts. This is also known as NYMEX crude.
Brent Crude Oil – Brent crude is a majorly trading crude oil extracted from 15 different oil fields near the North Sea. Originally, it was extracted at Brent oilfield near the North Sea in the UK. Now it is obtained by mixing crude oil grades extracted from various wells in the North Sea. Together, it is known as BFOE or Brent blend, Forties blend, Osberg, and Ekofisk. With the mixing of the four oil grades, Brent became a heavier oil. Still, it is considered to be relatively light and best suited for gasoline products.
Dubai Crude Oil – This crude oil is relatively heavier and primarily obtained at the only refinery in the United Arab Emirates.
There are other benchmarks like Canadian Crude Oil, Tapis Crude Oil, etc.
How are crude oil prices determined?
The crude prices, like any other commodity, are determined based on the demand and supply of crude oil. However, considering that crude has become an internationally high-demand commodity, the futures market (i.e. future demand and supply) determines its price. Additionally, other economic factors like market sentiments, war situation, etc affect the crude prices drastically. The primary factor to determine an oil price is its demand in the future. Hence, even a mere belief that oil demand will increase in the future can increase current crude prices.
Why Brent Crude Oil prices are important? Crude Oil vs. Brent Crude Oil
Brent Crude and WTI or NYMEX Crude are two largely traded oil benchmarks. Recently, Brent has been adopted increasingly as the preferred benchmark. In 2007, Bloomberg and Lehman Brothers reported that WTI prices are not a good barometer of world prices. The primary reason being, that 60% of the world’s traded oil is priced off using Brent, as per IEC Futures. Hence the Brent Oil price is the most relevant price to watch.
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