Oil Pricing

Vincent Kaminski

Any casual observer of the energy markets living in the US associates the price of crude with the price of the prompt WTI contract traded on Nymex. The reality of crude pricing, given the multiplicity of grades and locations, is quite complex and poorly understood even by many practitioners in the energy industry. The world oil markets have evolved over the last 50 years towards increased transparency and efficiency of price discovery. Having said that, they have remained quite opaque and this condition gives a significant advantage to experienced traders operating in organisations with access to information about inventories, production trends, transportation flows, conditions of the physical infrastructure for the production and processing of crude oil, and other critical industry factors.

We will start this chapter with a review of the different ways of pricing oil in the past. The oil market today is based on a number of benchmarks (Brent, WTI, Oman/Dubai) that everybody complains about but still uses in the absence of a better alternative. The word “benchmark” may be somewhat misleading here, because in practice we are not dealing with a single easily identifiable price, but