Like FX and crypto markets, commodity markets are decentralised in that there’s no central venue that sets the price of any global commodity. This poses the obvious question: if that’s the case, then how do commodities traders know what they’re getting when they actually want to take possession of the underlying commodity?
Commodities are traded on global markets according to certain quality benchmarks. This allows producers from all over the world to sell their goods on the global market, as long as they ensure that their products, be they crude oil, wheat, or orange juice, are of a comparable grade to everyone else’s.
These markets require that the commodities they list are standardized, so that any unit can be interchangeable and of equal quality with any other.
In the case of crude oil, the sulphur, wax, and metal content of a type of crude oil can vary greatly from another. This can make it harder and costlier to refine certain crude oils into the petrol used to power consumer vehicles.
A region’s crude oil can be measured for quality and compared to that of a different region, and over the years, different benchmark grades have developed.
The most popular of these grades are West Texas Intermediate crude oil, which is also known as “light sweet crude,” meaning that it is less dense, less viscous, and lower in sulphur and heavy metal contaminants than “heavy crudes.”
The second most popular premium grade crude oil is Brent Crude, which is considered a light crude despite being slightly heavier than WTI.
WTI (LCRUDE) is extracted from the North American Permian basin, whereas Brent crude is extracted from over a dozen wells in the North Sea of England. These offshore wells are harder and costlier to mine, which causes Brent crude to trade at a slight premium as compared to WTI.