Crude oil is not a homogenous commodity. There are various types of internationally traded crude oil with different qualities and characteristics. The light/sweet crude grades usually trade at a premium over the heavy/sour crude grades.
Crude oil is produced in many different countries. The pricing for those crude streams is often determined elsewhere, and each crude oil will trade as a spread to a core benchmark. This is referred to as a premium or a discount to a marker crude.
Term or spot sales of crude oil are sold in two ways. Crude oil may be sold on a “fixed price” basis. Alternatively it may be sold on a “formula pricing” basis. The formula pricing method links the contract price of each crude cargo to a benchmark price, and it is the basis of the current oil pricing system. The three biggest Crude oil benchmarks are WTI, Brent and Dubai-Oman.
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