Commodities · Explainer
How the oil price you read about is set
There is no single oil price. There are benchmark grades, delivery points and futures contracts that most physical barrels are priced against.
The short answer
- Benchmarks describe a specific grade delivered at a specific place.
- Futures settle against assessed physical prices, not the other way round.
- Spreads between grades reflect refining economics, not market sentiment.
Crude oil is not a uniform product. Grades differ in density and sulphur content, which determines what a refinery can make from them and at what cost. Benchmarks exist so that thousands of non-standard cargoes can be priced as a differential to a common reference.
What a benchmark specifies
- A grade or basket of grades with defined quality parameters.
- A delivery location and mechanism — pipeline, terminal or floating cargo.
- A pricing window during which trades are assessed.
Futures and physical are linked, not identical
A futures contract standardises delivery so that financial participants can trade the price without handling barrels. Convergence at expiry ties it to physical reality; storage capacity at the delivery point is what enforces that link, which is why local bottlenecks can distort a global-looking price.
Contango and backwardation
When later-dated futures trade above spot, storage is being paid for and the market is well supplied. When the curve inverts, buyers are paying a premium for immediate barrels — the clearest available signal of physical tightness.
Sources
- Petroleum and other liquids data — U.S. Energy Information Administration
- Oil market reports — International Energy Agency
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