Making a substantial investment decision starts by truly understanding the product of your investment. In this case, the crude oil itself.
Crude oil is a natural resource extracted from Mother Nature via drilling deep down into its core using gigantic drilling machines. This oil is gathered together with other natural resources like natural gas and saline water. It is then processed and refined into an extensive variety of products, including petroleum and plastics.
The amount of crude oil is extremely limited in this world because this particular oil is actually a type of ancient creation that dates back millions of years. Crude oil is formed when the remains of prehistoric algae and plankton fell into the very bottom of the ocean, merging with the mud underneath, seeping through layers and layers of sediment, then heated for millions of years until they turn into liquid. And so, crude oil is considered a nonrenewable source of energy, for it needs millions of years to be created when the supply runs out.
Crude oil is drilled and extracted from numerous places in the world. However, there are currently two primary benchmarks that you need to pay attention to if you want to invest in it.
1. North Sea Brent Crude
Brent crude is the primary benchmark of crude oil around Europe, Africa, and the Middle East. It originally refers to the oil extracted from 15 different fields in the North Sea. Nowadays, however, there are four widely recognized oil fields namely Brent, Forties, Oseberg, and Ekofisk.
Brent crude oil is heavier with high gravity and a lot of impurities. That is why it takes more time and effort to process and refine this crude into usable oil like gasoline and diesel fuel, resulting in a higher price than say the US crude oil. Still, Brent crude is considered as one of the crucial benchmarks of crude oil trading because around 66% of all oil contracts in the world use Brent crude as their price reference. And since this crude oil is produced close to the sea, the cost of international transport is considerably lower.
Brent crude oil is mainly traded on the Intercontinental Exchange (ICE).
2. West Texas Intermediate (WTI)
The West Texas Intermediate crude oil refers to a blend of oil extracted from oil wells around the United States and delivered to Cushing and Oklahoma via pipeline. This type of crude oil is considered as high-quality due to its “lighter” and “sweeter” characteristics. Compared to Brent crude, it takes more effort to process and refine this oil into usable oil material.
On the other hand, since the WTI crude oil is produced in oil wells that are mainly located on land, the distribution process can be a challenge, and therefore, require much higher transportation costs. That is one of the main reasons why despite the higher quality of WTI crude oil, it is mainly used in the local US markets. The high costs of distributing the WTI crude oil overseas makes it almost impossible for the WTI to compete with the Brent crude oil pricing. Hence, Brent crude is much favored by international markets.
The WTI crude oil is mostly traded in the New York Mercantile Exchange (NYMEX).
Brent and WTI crude oil are the most crucial benchmarks that you need to know about because the price of these two oils often moves in entirely different directions. This brings us to the term “Brent-WTI spread” in online crude oil trading, which means the price difference between Brent and WTI crude oil.
Crude oil is also commonly known as the black gold of the investment business, although the color of this product is not always necessarily black. You can trade crude oil using the old-fashioned way of actually buying and selling the product, but it will be such a bother since this product needs special storage and extremely high maintenance.
Therefore, you can choose to trade oil online via various oil trading brokers using Spot Contracts and Future Contracts. However, as this type of oil trading can be considered expensive with its high margin requirement, retail traders with limited source of funding can benefit from online crude oil trading in forms of contract-for-difference or commonly known as CFD, where they can profit from oil pricing differences.