Crude Oil Basics: Types of Crude Oil

Many think of crude oil as one single commodity that’s the same everywhere. But that isn’t the case. It actually has many different varieties.

Rekha Khandelwal, CFA - Author

Nov. 26 2019, Published 3:11 p.m. ET

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Many think of crude oil as one single commodity that’s the same everywhere. But that isn’t the case. It actually has many different varieties. Before we discuss the different types of oil, let’s first see how it’s formed.

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How crude oil is formed

Crude oil (USO) is a fossil fuel. It was formed from the remains of sea animals and plants that lived millions of years ago. The remains of these animals and plants were buried under sand, silt, and rock. Heat and pressure over millions of years then turned the remains into hydrocarbon products including crude oil. The word “petroleum” is derived from the Latin word meaning “rock oil.” As it takes millions of years, as well as geological changes, for these remains to convert into oil, the oil reserves available to humankind are limited, or nonrenewable.

Types of crude oil

The quality of crude oil varies, especially in different geographical regions. The types of oil aren’t discrete. Rather, there are several variations with small differences among them. The quality or type of oil is primarily based on two characteristics—density and sulfur content. Crude oil with lower density is called “light oil,” while oil with higher density is called “heavy oil.” Similarly, oil with low sulfur content is called “sweet oil,” whereas oil with high sulfur content is called “sour oil.”

Generally, crude oil with low density and low sulfur content (light sweet oil) is better because it’s easier and cheaper to refine it into petroleum products for end use. This means it’s priced higher than heavy sweet or heavy sour oil.

Crude oil’s density is measured using API (American Petroleum Institute) gravity. A higher API gravity indicates a lower density. The higher the API gravity, the better the oil quality.

WTI versus Brent

Both WTI (West Texas Intermediate) and Brent are light sweet crude oils. WTI’s price is mostly used as a benchmark oil price in the US, while Brent is widely used as a global oil price benchmark. WTI oil is produced in the US—mainly in Texas, Louisiana, and North Dakota. On the other hand, Brent oil is sourced from the North Sea.

Increased shale oil production in the US has resulted in WTI trading at a discount to Brent since 2011. The U.S. Energy Information Administration forecasts that WTI will trade at an average discount of $5.5 per barrel to Brent in 2020.

To learn about the world’s top oil producers, read The World’s Top Oil-Producing Countries. You can also read about the largest oil companies in Must-Know: World’s Top Oil Companies by Production.


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