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After gold, oil is probably one of the first commodity markets investors will trade.

Oil is considered to be a lynchpin of the global economic, and ever since the energy crisis in 1973, economists have focused on oil and its relationship with the global economy.

Regular media coverage of energy markets also means that traders will keep an eye on the oil price and seek to measure its likely impact on other markets.

But not all oil is created equally, and newcomers may wonder why they see more than one oil contract on their trading screens.

Light versus heavy

Oil is measured according to its quality, like other commodities. For starters, oil has a weight, a gravity attached to it by the American Petroleum Institute (API).

This compares its liquid density to water, with ‘light’ crude oil having a higher rating (e.g. 60-70) than heavier and denser oil (10-20). Much depends on which oil fields the crude has been pumped from.

Sweet versus sour

The level of sweetness of oil is based on its sulphur content.

Sweet crude, generally oil with a sulphur content of less than 0.5%, tends to come from the North Sea fields, the central US, Africa and Asia. The sourer product will come from the Gulf of Mexico, Canadian oil sands, the Middle East (e.g. Saudi Arabia) and South America (e.g. Brazil).

Oil buyers tend to prefer the more high performance, sweeter variety.

Brent and WTI

Oil has two benchmark trading contracts in the futures market, namely Brent and WTI or West Texas Intermediate.

Brent crude is the benchmark for oil from Europe, the Middle East and Africa. It still tends to trade at a discount to WTI, which is sweeter.

Both markets will generally be seen to correlate over the longer term, but sometimes there will be short term price dislocations, leading to Brent seizing the higher ground. Some brokers will offer only the single contract – Brent, for example, is a firm favourite for smaller UK spread betting platforms.

Oil can also be traded as an ETF product on stock exchanges – e.g. USO, DWTI, OIL and UCO.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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