Arguably, the most important commodity in the world today is crude oil.

The product and its derivatives make their way into virtually every application of modern life from transportation to plastics. The vital commodity also dominates politics in many parts of the world and ensures that some top producing nations have outsized influence on the world stage. In light of this, many might assume that most investors know everything about the product and how it trades around the globe. However, that is not the case, as there are several misconceptions about the various types of oil and how this commodity is priced [see also USA Oil Reserves: The Worlds Largest?]. One of the most important issues is the varying types of oil and the differing benchmarks for crude oil prices around the world. Many might not realize that oil that is pulled out of the ground in Texas isnt generally the same as the product that comes from the North Atlantic. Instead, there are varying degrees of oil based on a variety of metrics such as the oils API gravity. This (American Petroleum Institute) gravity, is a statistic that is used to compare a petroleum liquids density to water. This scale generally falls between 10 and 70, with light crude oil generally having an API on the higher side of the scale while heavy oil has a reading that falls on the lower end of the range. Beyond API gravity, investors also need to take into consideration how sweet or sour a petroleum is. This is generally based on the sulfur content of the underlying fuel with 0.5% being a key benchmark. When oil has a total sulfur level greater than half a percent, then it is considered sour while a content less than 0.5% indicates that an oil is sweet. Sour oil is more prevalent than its sweet counterpart and it comes from oil sands in Canada, the Gulf of Mexico, some South American nations as well as most of the Middle East. Sweet crude, on the other hand, is generally produced in the central U.S., the North Sea region of Europe, as well as much of Africa and the Asia Pacific region. While both types are useful, end users generally prefer sweet crude as it requires less processing in order to remove impurities than its sour counterpart. So in summary, light and sweet forms of crude oil are heavily prized while heavy sour types of fuel often trade at a discount to their more indemand cousins [read Analyzing Five High Yielding Oil & Gas Pipeline Stocks]. With these two key factors, investors can then begin to price these different types of oil on the world market. Currently, there are two major benchmarks for world oil prices, West Texas Intermediate (WTI for short) crude oil and Brent crude oil. Both are light sweet crude oils although WTI is generally sweeter and lighter than its European counterpart. As a result of this, WTI often trades at a premium, usually by just a few dollars a barrel. However, thanks to a Libyan crisis which has decreased the supply of light sweet crude in the European region and a supply glut at the main storage facility for WTI in Oklahoma, the premium/discount situation has flipped and now Brent is more expensive than WTI. Future Can this reversal collapse back into historical levels? It seems likely, especially given the recent events in Libya. The long dictatorship in the country is now over and the citizens of Libya are greatly incentivized to get their pipelines back up and running, as oil was one of the major exports for the nation. So while the end of the Libyan dictatorship is obviously good news for the people of the North African country, it

could be even better news for petroleum users in Europe, although it remains unclear how long such a process might take. Should Libya manage to quickly return to normal and pump out vast amounts of their high quality crude, it could help to rapidly deflate the premium that Brent has over WTI crude and push the figures back towards historical means [see also 25 Ways To Invest In Natural Gas]. These events also demonstrate how impacted oil can be by geopolitical events and supply issues. Demand metrics alone clearly do not determine the price of oil across the world and investors need to be aware of this when considering buying into the crude oil market. A correct bet on a commodity might not be enough alone, often times investors must be sure to also select the correct type of commodity as well, as this can lead to vastly different returns far beyond what some investors might initially suspect. 've been asked lately with Brent crude prices rising over $100/bbl and WTI crude staying near $90 what the differences are. Many times, there are price differences between different types of oil as well, as some oils are more desirable than others. We'll cover that as well. For an answer to this popular question, I'll turn it over to an FAQ provided by the U.S. Energy Information Administration. Ready to learn? Here you go! According to The International Crude Oil Market Handbook, 2004, published by the Energy Intelligence Group, there are about 161 different internationally traded crude oils. They vary in terms of characteristics, quality, and market penetration. Two crude oils which are either traded themselves or whose prices are reflected in other types of crude oil include West Texas Intermediate and Brent. Comparing these two crude oils with EIA's Imported Refiner Acquisition Cost (IRAC), the OPEC Basket, and NYMEX futures is important to understand the differences among the various types of crude oil that are often referred to in the press and by analysts. Generally, differences in the prices of these various crude oils are related to quality differences, but other factors can also influence the price relationships between each other. West Texas Intermediate West Texas Intermediate (WTI) crude oil is of very high quality and is excellent for refining a larger portion of gasoline. Its API gravity is 39.6 degrees (making it a light crude oil), and it contains only about 0.24 percent of sulfur (making a sweet crude oil). This combination of characteristics, combined with its location, makes it an ideal crude oil to be refined in the United States, the largest gasoline consuming country in the world. Most WTI crude oil gets refined in the Midwest region of the country, with some more refined within the Gulf Coast region. Although the production of WTI crude oil is on the decline, it still is the major benchmark of crude oil in the Americas. WTI is generally priced at about a $5 to $6 per-barrel premium to the OPEC Basket price and about $1 to $2 per-barrel premium to Brent, although on a daily basis the pricing relationships between these can vary greatly.

Brent Brent Blend is actually a combination of crude oil from 15 different oil fields in the Brent and Ninian systems located in the North Sea. Its API gravity is 38.3 degrees (making it a light crude oil, but not quite as light as WTI), while it contains about 0.37 percent of sulfur (making it a sweet crude oil, but again slightly less sweet than WTI). Brent blend is ideal for making gasoline and middle distillates, both of which are consumed in large quantities in Northwest Europe, where Brent blend crude oil is typically refined. However, if the arbitrage between Brent and other crude oils, including WTI, is favorable for export, Brent has been known to be refined in the United States (typically the East Coast or the Gulf Coast) or the Mediterranean region. Brent blend, like WTI, production is also on the decline, but it remains the major benchmark for other crude oils in Europe or Africa. For example, prices for other crude oils in these two continents are often priced as a differential to Brent, i.e., Brent minus $0.50. Brent blend is generally priced at about a $4 per-barrel premium to the OPEC Basket price or about a $1 to $2 per-barrel discount to WTI, although on a daily basis the pricing relationships can vary greatly. NYMEX Futures The NYMEX futures price for crude oil, which is reported in almost every major newspaper in the United States, represents (on a per-barrel basis) the marketdetermined value of a futures contract to either buy or sell 1,000 barrels of WTI or some other light, sweet crude oil at a specified time. Relatively few NYMEX crude oil contracts are actually executed for physical delivery. The NYMEX market, however, provides important price information to buyers and sellers of crude oil in the United States (and around the world), making WTI the benchmark for many different crude oils, especially in the Americas. Typically, the NYMEX futures prices tracks within pennies of the WTI spot price described above, although since the NYMEX futures contract for a given month expires 3 days before WTI spot trading for the same month ceases, there may be a few days in which the difference between the NYMEX futures price and the WTI spot price widens noticeably.