In the oil market, a premium is the amount of money that a specific type of crude oil is priced above the benchmark price. A discount is the amount of money that a specific type of crude oil is priced below the benchmark price.
Benchmark price is the price of a type of crude oil that is widely traded and considered to be representative of the overall market price. In the oil market, the most common benchmark prices are West Texas Intermediate (WTI), Brent, Dubai, and Oman.
The price of a specific type of crude oil is often affected by its quality, location, and supply and demand. For example, light sweet crude oil is typically priced at a premium to heavy sour crude oil because it is easier to refine into high-value products. Crude oil that is produced in a more accessible location is also typically priced at a premium because it is easier to transport and deliver to buyers.
The spread between the price of a specific type of crude oil and the benchmark price is an important indicator of the relative value of that crude oil. A wider spread means that the specific type of crude oil is more expensive than the benchmark price, and vice versa.
Here are some examples of how premiums and discounts are used in the oil market:
- A refiner in the United States may buy Brent crude oil at a premium to WTI crude oil because it is cheaper for them to transport Brent oil from Europe than WTI oil from the Middle East.
- A producer of oil in the Middle East may sell Oman crude oil at a discount to Dubai crude oil because Oman crude oil is slightly lighter and sweeter than Dubai crude oil.
- Investors in the oil market may buy oil futures contracts at a premium to the spot price if they believe that the price of oil will rise in the future.
Premiums and discounts are a complex part of the oil market, and they can be affected by a variety of factors. However, they are an important tool for oil producers, refiners, and investors to understand the relative value of different types of crude oil.
Here’s a table sorted by price relative to Brent:
| Feature | Iraqi Crude | WTI | Brent | Iranian Crude | Dubai | Oman |
|---|---|---|---|---|---|---|
| Gravity | 33-36 API | 40-42 API | 39-42 API | 38-41 API | 33-35 API | 34-36 API |
| Sulfur content | 1.7-2.5% | 0.1-0.2% | 0.3-0.4% | 0.7-1.2% | 1.7-2.5% | 1.5-2.0% |
| Viscosity | Medium | Light | Light | Medium | Medium | Light |
| Price relative to Brent | -1-9% discount | 0-3% premium | 0-3% premium | 1-8% discount | 2-5% discount | 1-4% discount |
| Feature | Iraqi Crude | WTI | Brent | Iranian Crude | Dubai | Oman |
|---|---|---|---|---|---|---|
| Price relative to Brent | -1-9% discount | 3% | 3% | 1-8% discount | 2-5% discount | 1-4% discount |
| Viscosity | Medium | Light | Light | Medium | Medium | Light |
| Gravity | 33-36 API | 40-42 API | 39-42 API | 38-41 API | 33-35 API | 34-36 API |
| Sulfur content | 1.7-2.5% | 0.1-0.2% | 0.3-0.4% | 0.7-1.2% | 1.7-2.5% | 1.5-2.0% |
