What are Brent and WTI, and how is the price of oil set?

There is no single price of oil. The price quoted in the news is for a benchmark, usually Brent or WTI, and it comes from futures contracts: standardized agreements to buy or sell a set amount of oil at a price fixed today, for delivery at a set date in the future. Those contracts are traded on exchanges, so the price moves as buyers and sellers change their minds.

Why benchmarks? Because oil is not one thing. Its price differs by grade, which depends on how dense it is and how much sulfur it holds, and by location. Heavier, sour crude oils with no access to the sea are cheaper than lighter, sweeter ones such as WTI. So the market picks a few standard oils and quotes everything else against them. Brent, first extracted from the Brent oilfield in the North Sea in 1976, is said to set the prices for approximately 80 percent of global petroleum trade. WTI, or West Texas Intermediate, is the other main benchmark, traded in New York, and unlike Brent it is not tied to any one oilfield.

Futures have been used for oil since the 1980s: the New York Mercantile Exchange launched crude oil futures contracts in 1983 and London's International Petroleum Exchange launched its own in June 1988. They serve two kinds of people. Some use them to hedge, meaning to lock in a price and reduce risk. Others use them to speculate, betting on which way the price will move.

A contract is a promise about the future, not a barrel in your hand, and that can lead to odd results. On 20 April 2020, with storage short, WTI futures contracts dropped below $0 for the first time in history, and the next day Brent fell below $20 a barrel.