Guide to Trading Crude Oil: Brent vs WTI Explained

Crude oil is the backbone of global energy markets, with over 100 million barrels consumed daily worldwide. Physical crude oil trading involves the actual delivery of oil from producing regions to refineries, as opposed to paper trading which deals in financial contracts. The market is dominated by national oil companies, major integrated oil companies, and independent trading houses like Vitol, Trafigura, and Glencore.

The price of crude oil is influenced by supply and demand fundamentals, OPEC+ production decisions, geopolitical events, refinery demand patterns, and seasonal factors. Understanding these drivers is essential for any physical commodity trader dealing in crude oil.

Brent crude originates from the North Sea and serves as the benchmark for approximately two-thirds of globally traded crude oil. It is a light, sweet crude with an API gravity of about 38 degrees and sulfur content around 0.37%. Brent is priced on the Intercontinental Exchange (ICE) and is the reference price for crude from Europe, Africa, and the Middle East.

West Texas Intermediate (WTI) is produced in the United States and priced on the NYMEX exchange. It has a slightly higher API gravity (about 39.6 degrees) and lower sulfur content (0.24%) than Brent, making it technically a higher-quality crude. However, Brent typically trades at a premium to WTI due to its global relevance and the landlocked delivery point of WTI at Cushing, Oklahoma.

Beyond Brent and WTI, dozens of crude oil grades trade globally, each with distinct characteristics. Dubai/Oman crude serves as the benchmark for Middle Eastern exports to Asia. Urals blend is Russia's primary export grade, trading at a variable discount to Brent. Bonny Light from Nigeria, Tapis from Malaysia, and Arab Light from Saudi Arabia are other widely traded grades.

Each grade's price is determined by its quality characteristics (API gravity, sulfur content, TAN number) and its location relative to refining centers. Refineries have specific crude diet requirements based on their processing configuration, which drives demand for different grades.

Physical oil trading involves negotiating cargo-by-cargo deals for actual delivery. Typical cargo sizes range from 500,000 barrels (Aframax tanker) to 2 million barrels (VLCC). Trades are negotiated on price differentials to the relevant benchmark — for example, 'Brent dated plus $1.50 per barrel' or 'Dubai minus $0.80.'

Payment terms are usually 30 days after bill of lading date, settled in US dollars via wire transfer. Letters of credit are used for counterparties with limited credit history. Insurance, freight, and demurrage costs are significant components of the total delivered cost, and which party bears these costs depends on the agreed Incoterm (typically FOB or CIF).

Crude oil prices can be extremely volatile, with daily movements of 3-5% not uncommon during geopolitical crises or supply disruptions. Physical traders manage price risk through hedging with futures and options on ICE and NYMEX. Counterparty risk, operational risk (spills, tanker incidents), and quality risk (off-spec delivery) are additional considerations.

Sanctions and trade compliance are increasingly important — traders must verify that crude oil transactions comply with applicable sanctions regimes, particularly regarding Iranian, Russian, and Venezuelan crude. Due diligence on the origin and chain of custody of oil cargoes is now standard practice.