Crude oil is the world's most actively traded commodity. It is divided into two types, "sweet" and "sour". "Sweet" crude oil contains less than 0.5 percent sulfur. "Light sweet crude oil" is the most sought-after version because it can be most easily processed into gasoline. The term "sweet" originated because the low level of sulfur gives the oil a slightly sweet taste. Nineteenth century prospectors tasted small quantities of the oil to determine its quality.
Sour crude oil is crude oil containing sulfur, an impurity which makes it a lower quality crude. When the total sulfur level in the oil is less than 1 percent the oil is called "sour." The heavier and more sour the crude, the more difficult and expensive it is to turn into usable refined products. Sour crude is therefore usually processed into heavy oil such as diesel and fuel oil.
Futures Trading in Crude Oil
Until the 1970s, the price of oil was relatively stable with production largely controlled by the biggest oil companies. Two oil price shocks in the '70s, however, brought price volatility in as a a fundamental feature of the market. At the same time, short-term physical markets rapidly evolved, and the need to hedge emerged.
Consequently, a group of interested parties founded the International Petroleum Exchange (IPE) in 1980 and the first contract, for Gas Oil futures, was launched the following year. The Brent Crude futures contract was launched in June 1988 and volumes grew rapidly and incremental, year-on-year growth has been evident since. In 2005 the IPE was acquired by ICE and its name changed to ICE Futures U.S..
Initially, oil futures and options were traded in pits on the market floor using the open outcry system. In 1997, the IPE began trading its first non-oil contract with the launch of IPE Natural Gas Futures. This contract was launched on the bespoke Electronic Trading Platform (ETS). This platform has been further enhanced since its launch and in 2005 all ICE energy contracts started trading exclusively on this electronic platform.
The New York Mercantile Exchange (NYMEX) developed energy futures and options contracts around the same time period as means of bringing price transparency and risk management to the market. The NYMEX WTI contract launched in 1983.
The two most heavily traded futures contracts on crude oil are the Brent Crude Oil contract and West Texas Intermediate Light Sweet Crude Oil. WTI crude was the flagship contract of the New York Mercantile Exchange (NYMEX), which was bought by the CME Group in 2008. The contract is now traded on CME Globex, CME Clearport and via open outcry on Nymex in New York. Its product symbol is "CL" and its contract size is 1,000 barrels The CME also offers a Brent futures contract. The Intercontinental Exchange offers both Brent and WTI futures.
NYMEX trades the WTI for both physical delivery and financial settlement, but its Brent contract is cash-settled only.