Oil & Refined Products

The Barrel and the Quality Matrix

Crude oil trades in US dollars per barrel, and a barrel is 42 US gallons. Beyond that, no two crudes are alike. Every stream sits somewhere on a two-axis quality matrix: API gravity, which measures density (higher API means lighter oil), and sulphur content, which separates sweet crudes below roughly 0.5% sulphur from sour crudes above it. Light sweet crudes yield more gasoline, diesel, and jet fuel per barrel and need less processing, so they command a premium. Heavy sour crudes trade at a discount and flow to complex refineries with the coking and desulphurization capacity to upgrade them.

There are hundreds of distinct crude streams in commerce, but almost none of them trade at an outright price. Each trades as a differential to one of a handful of benchmarks. The benchmark absorbs the macro view: global supply, demand, OPEC+ policy, war risk. The differential absorbs everything local: quality, freight, refinery appetite for that particular molecule. Understanding oil markets means understanding the benchmarks first.

Three Benchmarks

Three crude markers anchor world oil pricing. WTI is light sweet pipeline crude deliverable at Cushing, Oklahoma, and the NYMEX WTI futures contract is the most liquid commodity futures contract on earth. Its physical-delivery design was stress-tested on April 20, 2020, when the expiring May contract settled at negative $37.63 per barrel: with Cushing tanks effectively full during the COVID demand collapse, longs paid to escape delivery obligations. Brent is the waterborne marker for the Atlantic basin and prices most of the world's internationally traded crude. Behind the ICE Brent futures contract sits the dated Brent complex, a basket of physical cargoes (Brent, Forties, Oseberg, Ekofisk, Troll) that was widened in June 2023 to include WTI Midland, the first non-North Sea grade ever admitted, after North Sea output declined too far to support the assessment alone.

Dubai is the sour marker for crude flowing from the Middle East Gulf to Asia, assessed by Platts through a partials mechanism rather than traded on a futures exchange. Saudi Arabia, Kuwait, and Iraq set their official selling prices to Asian buyers against Dubai-linked averages, so it prices far more oil than its modest trading volume suggests. The Brent-Dubai exchange of futures for swaps, the EFS, is the bridge between the two halves of the market: it quotes the light sweet Atlantic world against the medium sour Asian world in a single spread.

Futures, Swaps, and the Platts Window

Oil derivatives settle against one of two kinds of reference price. Exchange futures (NYMEX WTI, ICE Brent, ICE Low Sulphur Gasoil, NYMEX RBOB and ULSD) print daily settlement prices, and most over-the-counter swaps cash-settle against either a single day's settlement or, more commonly in oil, the simple average of daily settlements across a calendar month. The averaging convention exists because physical oil is bought and sold continuously through the month, so a monthly average swap hedges the way the exposure actually accrues.

The second kind of reference is the price reporting agency assessment, dominated by Platts. For grades and products with no futures contract of their own (Dubai, jet fuel, marine fuel, naphtha), Platts assesses value daily through the Market on Close process: a structured electronic window in the final minutes before 16:30 local time in Singapore, London, and Houston, in which firm, executable bids, offers, and trades are published and the closing assessment is built from them. Swaps against those assessments clear on CME and ICE, so the distinction between "futures markets" and "assessment markets" is about where the settlement price comes from, not about whether the risk can be cleared.

Crack Spreads: the Refiner's P&L

A refinery buys crude and sells products, so its gross margin is a spread: the crack spread. The most quoted version is the 3-2-1, which approximates a US refinery by selling two barrels of gasoline and one barrel of diesel against three barrels of crude. Individual product cracks (RBOB versus WTI, gasoil versus Brent, jet versus Brent) isolate the margin on a single product. Crack spreads are the transmission mechanism between the crude and product markets: when cracks are wide, refineries run flat out, which lifts crude demand and adds product supply until the spread narrows. When cracks collapse, runs get cut. Traders watch cracks the way equity analysts watch earnings, because that is exactly what they are.

Three Product Hubs

Refined products trade around three regional hubs, each with its own units and instruments. The Americas price off New York Harbor and the US Gulf Coast in US cents per gallon, anchored by the NYMEX RBOB gasoline and ULSD contracts. Europe prices off the ARA barge market (Amsterdam, Rotterdam, Antwerp) in dollars per tonne, anchored by ICE Low Sulphur Gasoil futures. Asia prices off Singapore, the world's largest bunkering port and the assessment center for Asian gasoline, jet, gasoil, naphtha, and marine fuel. Products arbitrage constantly between the three hubs, with freight as the gatekeeper: when the New York gasoline price exceeds the European price by more than the cost of a transatlantic tanker, cargoes move.

This group covers the three crude benchmarks and six product markets in fact-sheet form. For the full treatment, from reservoir geology through refining chemistry to options on calendar spreads, Oil 101 by Morgan Downey covers all of it in depth, with a free interactive second edition at oil101.morgandowney.com.