Crude oil is unrefined petroleum: a naturally occurring mixture of hydrocarbons extracted from the earth and used as a feedstock for refining. For a quant, “oil exposure” needs a more precise description. The grade, pricing location, delivery date and instrument determine which price changes affect the position.
Crude is the input to a refinery, not the gasoline or diesel sold from it. The EIA's explanation of petroleum products describes how refining turns crude into usable products. A refinery's economics therefore depend on both its crude purchase cost and the prices of its output products, together with processing costs and yields. A crude-price hedge alone does not fix its refining margin.
A quote is a specified barrel
Crude streams differ in density and sulfur content. Light and heavy describe density; sweet and sour describe sulfur content. Higher API gravity indicates lower density. Those properties affect what a refinery can produce and how much processing it requires. The EIA's quality guide explains why lighter, lower-sulfur crude often commands a premium. “Often” matters: refinery capabilities, demand and logistics also affect the relative price.
Consider an outright cash purchase of 100 barrels of fictional crude grade A, available for immediate collection at fictional Terminal A. Its stipulated commodity spot price is USD 70 per barrel. The gross spot notional is
The parcel and price are synthetic. This is the gross cash amount for that specified physical lot, before freight, storage, tax and other charges; it is not a futures margin deposit or an exchange contract size.
An original synthetic crude parcel. Grade, location, delivery and transaction terms identify the price; quantity converts that price into a gross dollar exposure. Freight, storage, tax and other charges are excluded.
Holding quantity and all specifications fixed, a rise of USD 1 per barrel raises the unhedged parcel's gross value by USD 100, from USD 7,000 to USD 7,100. A quote for a different grade or terminal cannot simply replace the original quote in that calculation. Transport availability, quality adjustments and delivery obligations must be reconciled first.
WTI and Brent name different market exposures
West Texas Intermediate (WTI) and Brent are important crude-oil benchmarks. A benchmark gives the market a shared pricing reference; it does not make every crude stream physically interchangeable. Grades, pricing locations and contract terms differ, and the spread between benchmarks can move.
For derivatives, identify the particular futures contract as well as the benchmark name:
| Contract | Delivery or settlement distinction |
|---|---|
| CME Group's NYMEX WTI Light Sweet Crude Oil futures | Physically delivered through the contract's arrangements at Cushing, Oklahoma. |
| ICE Brent Crude Futures | A deliverable contract using exchange of futures for physical (EFP), with an option to cash settle against the ICE Brent Index. |
These are the exchange arrangements checked on 27 October 2026, not a rule for every product carrying “WTI” or “Brent” in its name. CME's delivery explanation and ICE's product specification describe the respective mechanisms. Check the actual product and contract month before modelling delivery, expiry or settlement.
A futures position is also different from owning stored barrels. Its quoted notional is not the cash paid to acquire physical inventory; futures bring margin cash flows and contract obligations. Physical holdings instead require the capacity and arrangements to store, transport and deliver the oil.
Follow the exposure to the business
An oil producer with an unpriced future sale is hurt by a fall in its selling price. A refiner with an unpriced crude purchase is hurt by a rise in its input price, considered separately from the value of its refined output. Short futures can offset a producer's price exposure; long futures can offset a buyer's price exposure. Differences between the physical price and the hedge price leave basis risk.
Inventory adds a time dimension. Oil available where a refinery needs it can have an operational benefit, called convenience yield. Financing, storage, availability and delivery timing help explain why forward-curve prices differ across dates. A curve is a set of today's prices for different delivery dates, not a promise of the later spot-price path.
The Commodities primer develops these links between physical specifications, storage, curve shape and a worked producer hedge. Its preview is public; the full lesson requires a signed-in free account.
Sources
- John C. Hull, Options, Futures, and Other Derivatives, ninth Global Edition, Pearson, 2018, Section 34.3, “Energy Products,” subsection “Crude Oil,” printed page 799; Section 3.1, “Short Hedges” and “Long Hedges,” printed pages 72–73; Section 5.11, “Futures on Commodities,” subsection “Convenience Yields,” printed pages 144–145. Grounds crude grades, refining, settlement, hedge directions and the operational value of inventory. The synthetic parcel and figure are original.
- U.S. Energy Information Administration — Oil and petroleum products explained, checked 27 October 2026, “What is crude oil and what are petroleum products?” and “What petroleum products are made from crude oil?”
- U.S. Energy Information Administration — Crude oils have different quality characteristics, published 16 July 2012 and corrected 26 June 2013; checked 27 October 2026. Supports density, sulfur and refinery-processing distinctions; no historical chart values are used.
- CME Group — Delivery of WTI futures, checked 27 October 2026. Supports physical delivery at Cushing; no market forecast or current inventory figure is used.
- ICE — Brent Crude Futures, checked 27 October 2026, “Description” and “Delivery/Settlement Terms.” Supports the EFP mechanism and cash-settlement option against the ICE Brent Index.