"The price of oil" doesn't exist. There are dozens of crudes, priced off two or three benchmarks, in different places, of different quality — and the gaps between them are where a lot of the real money is made.
5.1Crude oil grades & API gravity
Crude is classified on two axes. Density — measured as API gravity, where higher API = lighter oil; "light" crude (high API) yields more valuable petrol and diesel, so it's worth more. Sulphur content — "sweet" (low sulphur) is easier to refine and cleaner than "sour" (high sulphur). The most prized crude is light and sweet.
| Grade | Ticker | What it is |
|---|---|---|
| WTI | CL | West Texas Intermediate — light, sweet, the US benchmark; delivered at Cushing, Oklahoma (landlocked). |
| Brent | BZ / B | North Sea — light, sweet, the global seaborne benchmark; prices ~two-thirds of the world's crude. |
| Dubai / Oman | DME | Medium, sour — the benchmark for Middle East crude sold to Asia. |
| WCS | — | Western Canadian Select — heavy, sour; trades at a steep discount to WTI (quality + pipeline constraints). |
| Urals | — | Russia's medium-sour export grade; pricing dislocated by sanctions. |
WTI $78.00, Brent $82.50:
WTI usually trades a few dollars under Brent because it's landlocked at Cushing and harder to get to the global market. The spread widens when US production booms or export capacity is constrained, and narrows when global supply is the binding factor. Traders trade the spread itself (long one, short the other) to bet on US-vs-global dynamics without taking a flat price view. [Calc] tie-in: a simple spread calculator.
The world consumes roughly 100 million barrels per day. At ~$80 that's around $2.9 trillion a year of physical value — the single largest commodity market on the planet, and CL/BZ futures are among the most liquid commodity contracts that exist. One CL contract controls 1,000 barrels (~$80,000 notional at $80). Verify with the IEA / EIA.
5.2What moves the price of oil?
| Catalyst | Simple reaction | The non-obvious second-order |
|---|---|---|
| OPEC+ cuts output | Less supply → price up | If the cut signals OPEC sees weak demand, or if members are expected to cheat on quotas, the rally can fade fast. |
| US inventory build (EIA) | More supply on hand → price down | A build driven by a refinery outage (crude piles up because it isn't being processed) is bullish for products even as crude falls. |
| Geopolitical flare-up | Supply-risk premium → price up | The premium deflates quickly if actual barrels keep flowing; "buy the rumour, sell the fact" is brutal in oil. |
| Strong global growth | More demand → price up | A strong dollar (often paired with US strength) works the other way, capping the rally — watch DXY alongside. |
| Curve flips to backwardation | Signals tight prompt supply | Also creates a positive roll yield — long positions get paid to hold, which itself attracts trend-following flows. |
The release calendar matters: the EIA weekly petroleum status report (US inventories) and the privately-published API figures the night before are major scheduled catalysts. OPEC+ meetings, IEA/EIA monthly demand forecasts and refinery maintenance seasons round out the diary.
5.3Refined products & the crack spread
Refineries buy crude and sell products: gasoline (US RBOB, RB), heating oil / ultra-low-sulphur diesel (HO), and jet/gasoil in Europe. A refiner's margin is the difference between what they pay for crude and what they get for the products — the crack spread. It's one of the most important trades in energy because it isolates refining economics from flat oil price.
A typical barrel of crude refines into roughly 2 parts gasoline to 1 part distillate, so the standard proxy uses 3 barrels of crude → 2 of gasoline + 1 of heating oil. Products quote in $/gallon; there are 42 gallons per barrel, so convert first.
Gasoline $2.45/gal, heating oil $2.55/gal, WTI $78.00/bbl:
Crude cost = 3 × 78.00 = $234.00
Crack = (312.90 − 234.00) ÷ 3 = 78.90 ÷ 3 = $26.30 per barrel
That $26.30 is the refiner's gross margin per barrel. Refiners sell the crack to lock in margin (short crude, long products); speculators trade it on the view that margins will fatten (driving season) or collapse (demand slump). Watch the gallon-to-barrel conversion — forgetting the ×42 is the classic error.
5.4Natural gas — the most regional commodity there is
Unlike oil, gas is expensive to move (it must be liquefied into LNG to cross oceans), so prices are regional and can diverge wildly. There are three benchmarks you must know.
| Benchmark | Region | Notes |
|---|---|---|
| Henry Hub NG | USA | The US benchmark, priced in $/MMBtu; contract = 10,000 MMBtu. Cheap, abundant shale gas. |
| TTF | Netherlands / Europe | The Dutch Title Transfer Facility — the European gas benchmark, priced in €/MWh. Hyper-sensitive to pipeline flows, storage and weather; the centre of the 2022 energy crisis. |
| NBP | UK | The UK's National Balancing Point, priced in pence/therm. Closely tracks TTF. |
| JKM | Asia (LNG) | Japan-Korea Marker — the Asian spot LNG benchmark. The spread between JKM and TTF decides which way LNG cargoes sail. |
Gas is intensely seasonal and weather-driven: demand spikes in winter (heating) and increasingly in summer (cooling/power). Storage levels versus the five-year average are the headline number traders watch. The spark spread — the margin from burning gas to make electricity — links gas to power markets.
Natural gas is the poster child for contango roll drag (Part 1.4) because storage is costly and the curve is often steeply upward-sloping. Say front-month NG = $2.50, next month $2.70:
Twelve such rolls ≈ a catastrophic annual drag even before any spot move
This is why UNG has lost the overwhelming majority of its value over its life and reverse-split repeatedly, despite gas prices being higher at times than when it launched. Never hold a gas ETF as a long-term bet on gas. For a sustained view, use the futures curve deliberately, gas-producer equities, or further-dated contracts where the roll is gentler.
| Catalyst | Simple reaction | The non-obvious second-order |
|---|---|---|
| Cold-weather forecast | Heating demand → price up | Gas can spike intraday on a forecast revision alone, then collapse when the cold doesn't arrive — it trades the weather model, not just the weather. |
| Storage build above average | Oversupplied → price down | If storage is full and can't take more ("congestion"), prices can briefly go negative at some hubs. |
| Europe loses pipeline supply | TTF spikes | High TTF pulls LNG away from Asia, dragging JKM up too — a regional shock goes global through the LNG arbitrage. |
Natural gas is a multi-hundred-billion-dollar global market and the fastest-growing part of the energy mix via LNG trade. TTF became one of the most-watched prices in the world during 2022, when European gas briefly traded at the energy equivalent of several-hundred-dollar oil. Verify with the IEA / exchange.
5.5Coal, carbon & power
- Coal (e.g. Newcastle/API2 benchmarks) — still a major fuel for power and steel; traded via OTC swaps and some futures. Tightly linked to gas (fuel-switching) and to Chinese demand.
- Carbon (EU ETS, ticker
EUA) — emissions allowances that polluters must buy. A genuinely policy-created market: the price is set by how many allowances regulators issue. Higher carbon prices make gas more competitive than coal, linking the whole complex together. - Power / electricity — the hardest commodity of all because it can't be stored cheaply, so prices are set in real time and can be extraordinarily volatile (even negative when renewables flood the grid). Traded as forwards by region and time block.
The complex is interconnected: gas prices set power prices via the spark spread; carbon prices tilt the coal-vs-gas switch; crude sets product prices via the crack; TTF and JKM are joined at the hip by LNG flows. The best energy traders rarely take a naked flat-price bet — they trade the relationships (cracks, spark spreads, regional gas spreads, calendar spreads) where the edge is cleaner and the risk is more defined. Parts 9.1 and 9.3 go deeper on spread and roll mechanics.