Why is there no single price for oil?
The headline says "oil rose to $80 today." A practitioner reading that has three immediate questions: which oil, where, and for when? Answer all three and you have a price. Answer fewer and you have a slogan.
Coordinate one: grade
Crude oil is not a substance, it is a category. Two measurements do most of the sorting:
- API gravity — a density scale. Higher means lighter. Above about 31° is called light; heavy crudes run into the low 20s and below.
- Sulphur content — below about 0.5% is sweet; above it is sour.
West Texas Intermediate is roughly 40° API and under 0.5% sulphur — light and sweet, the easy stuff. Western Canadian Select is roughly 21° API with about 3.5% sulphur — heavy and sour, a thick, contaminated feedstock.
This matters because refineries are built for a diet. A simple refinery can only run light sweet crude. A complex one with a coker and hydrotreating units can break heavy molecules down and strip sulphur out — expensive equipment that only pays for itself if heavy crude is cheaper. So it is: heavy sour grades routinely trade at a discount of $10 to $25 a barrel to light sweet benchmarks.
A worked example. A refinery can buy light sweet at $76 or heavy sour at $58 — an $18 discount. Processing the heavy barrel costs an extra $8 in energy, hydrogen and catalyst. The advantage is:
18 − 8 = $10 a barrel.
On 200,000 barrels a day that is $2 million a day. This is why refinery configuration is a genuine economic asset, and why "the oil price" is not a number any refiner can plan with.
Coordinate two: place
A barrel in Alberta is not a barrel in Rotterdam, and the gap between them is not opinion — it is the cost of moving it. Pipeline tariffs, rail rates, tanker freight, and, crucially, capacity. When a pipeline is full, the marginal barrel must move by rail at several times the cost, and the price difference between the two locations widens to match. Build the pipeline and it collapses again.
The same logic runs everywhere in commodities. Iron ore is quoted as 62% Fe, CFR China — a grade and a delivery basis. Copper trades on the LME for metal in a listed warehouse, and an actual smelter customer pays that price plus a regional physical premium to have it at their plant. Natural gas, as the next unit shows, is so hard to move that different continents run entirely separate price levels.
Coordinate three: time
A barrel today and a barrel in December are different goods, because owning the December barrel means someone has to store and finance it until then. That relationship — the futures curve — is built properly in The cost of carry. Here, just hold the point: the date is part of the price, not a detail attached to it.
For a physical cargo the date is usually a window rather than a day. A term contract does not take the assessment on one date; it takes the average of the published assessment over a pricing period, commonly the month of loading or a run of quoted days around the bill-of-lading date, plus the agreed differential. The buyer's exposure is therefore to an average, and a hedge placed as one futures trade on one day covers one day of it. Desks hedge such a contract with a strip of futures spread across the window, or with a swap that settles on the same average. The rule for which days count is written into the contract, and that rule is part of the price.
How the market copes: benchmarks and differentials
Quoting every grade at every location every day would be unmanageable. So the market picks a small number of benchmarks and prices everything else as a differential to one of them.
In practice you will see quotes like "Mars sour at Brent minus $2.10" or "WCS at WTI minus $14". The benchmark carries the market-wide move; the differential carries the quality and location story. When you read that "oil fell $3", the benchmark fell $3 — and the barrel a specific refiner actually buys may have fallen $2 or $5.
For grades with no exchange contract, the price is not discovered on a screen at all. Price reporting agencies — Platts, Argus and others — survey completed deals and bids, apply a published methodology, and issue an assessed price each day. Physical contracts worth billions then reference that assessment. It is an unusual arrangement, and it exists because the alternative is every buyer and seller negotiating a price from first principles on every cargo.
The rule to keep
Grade + delivery point + delivery date = a price. Change any one coordinate and you have a different price, quoted by different people, in a different contract. Every "commodity price" you will ever see is a specific point in that three-dimensional space, and the benchmark is simply the point everyone agreed to measure from.
In the data
A price series for "oil" always names which oil, where, if you read its label. The monthly crude series below is called West Texas Intermediate at Cushing, Oklahoma, in dollars per barrel.
The grade and the delivery point are part of the series itself: nothing moves that barrel to Rotterdam or changes its sulphur content. Read the number without reading the name and you have silently accepted somebody else's answer to which oil, where.
Try it now
- Two crude benchmarks over the same twelve months are below — WTI first, Brent second. Read today's close off each. The gap between them is not an error and not a rounding difference: it is the location-and-quality coordinate, priced.
- Now check that the gap moves. Use Measure on each chart across the same stretch — the last three months will do — and compare the two percentage changes. If these were one price with two names the two numbers would match. They do not, and the difference between them is the spread widening or narrowing while you watch.
- Next time you read a commodity headline, write down which of the three coordinates it specified: grade, place, date. Most specify one, and the other two are doing work whether or not the headline mentions them.