How Oil Prices Are Set: WTI, Brent and What Drives the Market
The oil price on the evening news is a futures price for a specific grade delivered to a specific place. This guide explains WTI and Brent, how futures markets set the price, the forces behind supply and demand, and how a barrel of crude turns into the price Americans pay at the gas pump.
When a news anchor says "oil closed at" a certain price, they are almost always quoting a futures contract: either West Texas Intermediate (WTI) traded in New York or Brent traded in London. Those two benchmarks anchor the price of most crude oil sold around the world, and through refining they shape what Americans pay for gasoline, diesel and jet fuel. Understanding how they work makes the headlines far easier to interpret.
Crude is not one product
Crude oils differ by density (light or heavy) and sulfur content (sweet or sour). Light, sweet crudes are easier to refine into gasoline and diesel and usually command higher prices. Because there are hundreds of grades, the market prices most of them as a premium or discount to a few benchmarks.
| Benchmark | Where it comes from | Delivery and settlement | Main exchange |
|---|---|---|---|
| WTI | US inland fields, priced at Cushing, Oklahoma | Physically delivered at Cushing storage hub | NYMEX (CME Group) |
| Brent | North Sea blend, now including other light grades | Cash-settled against a price assessment | ICE Futures Europe |
| Dubai/Oman | Middle Eastern medium sour crude | Reference for crude sold into Asia | Various |
WTI matters most for US domestic prices; Brent is the reference for a much larger share of internationally traded oil. The spread between them reflects transport costs, pipeline capacity out of the US interior and differences in regional supply.
How futures set the price
A futures contract is an agreement to buy or sell a fixed quantity (1,000 barrels for the standard WTI contract) at a set price for delivery in a future month. Contracts are listed for many months ahead, creating a futures curve.
Prices are discovered by the interaction of:
- Producers and consumers hedging, such as drillers locking in prices for future output and airlines locking in fuel costs.
- Refiners and physical traders who buy and sell actual barrels.
- Financial participants, including funds and speculators, who provide liquidity and take views on direction.
The "front-month" contract, the one nearest to expiry, is the price usually quoted. The futures market is regulated in the US by the Commodity Futures Trading Commission (CFTC), which also publishes weekly data on who holds positions.
The shape of the curve carries information. When near-term prices are above later ones (backwardation), the market is signaling tight supply right now. When later prices are higher (contango), supply is ample and storage is being rewarded.
What drives supply
- OPEC+ decisions. The Organization of the Petroleum Exporting Countries and allied producers coordinate output targets. Announcements of cuts or increases can move prices sharply.
- US shale production. The United States became the world's largest crude producer over the past decade, largely from shale fields such as the Permian Basin in Texas and New Mexico. Shale output responds to prices more quickly than conventional projects but still with a lag of months.
- Geopolitics and disruptions. Conflicts, sanctions, attacks on infrastructure and shipping chokepoints can remove barrels or raise the risk of losing them.
- Inventories. The US Energy Information Administration (EIA) publishes weekly inventory data for crude and refined products, closely watched by traders as a near-real-time read on balance.
- Strategic reserves. The US Department of Energy manages the Strategic Petroleum Reserve, emergency crude stored in underground salt caverns along the Gulf Coast, which can be released or refilled.
What drives demand
- Economic growth, especially in transport, manufacturing and petrochemicals. Recessions reduce demand; strong growth increases it.
- China and other emerging economies, which account for much of the growth in global consumption.
- Seasonality, including the US summer driving season and winter heating demand.
- Efficiency and electrification, which shape long-term demand expectations more than near-term prices.
- The US dollar. Because oil is priced in dollars, a stronger dollar makes it more expensive for buyers using other currencies, which can weigh on demand and prices.
When the market breaks: April 2020
The clearest illustration of how futures work came in April 2020. Pandemic lockdowns had collapsed fuel demand, and storage at Cushing was filling up. As the May WTI contract approached expiry, holders who had no way to take physical delivery had to sell, but few buyers had anywhere to put the oil. The contract settled below zero for the first time. Brent, which is cash-settled, did not follow it negative. The episode showed that a benchmark price reflects a particular contract's delivery terms as well as the value of oil in general.
From a barrel to the gas pump
A 42-gallon barrel of crude yields a mix of products, with gasoline the largest share in US refineries. The EIA breaks the retail price of a gallon of regular gasoline into four parts:
- Crude oil cost, usually the largest component.
- Refining costs and profits, which widen when refinery outages or seasonal fuel-blend changes tighten supply.
- Distribution and marketing, covering pipelines, trucks and station operations.
- Taxes, including the federal excise tax and state taxes that vary widely.
That is why gas prices differ so much between states. California, for instance, has its own fuel specifications and higher state taxes and fees, while Gulf Coast states sit next to large refining centers. It also explains why pump prices often lag crude moves: stations price off replacement cost and existing inventory, and retail margins tend to compress when wholesale prices rise quickly and recover as they fall.
Natural gas is a different market
Headlines often lump "oil and gas" together, but US natural gas prices follow their own logic. The main US benchmark is the Henry Hub futures contract, named for a pipeline hub in Louisiana. Because gas is harder to ship across oceans than crude, it has historically been priced more regionally, driven by weather-related heating and cooling demand, storage levels reported weekly by the EIA, and US production. The growth of liquefied natural gas (LNG) exports has tied US prices more closely to global markets, but a cold snap in the US can still move gas sharply while crude barely reacts.
How investors get exposure
Individual investors can gain exposure to oil through energy company stocks, energy sector funds, oil futures, or exchange-traded products that hold futures. The last group can diverge significantly from the spot price over time because of the cost of rolling contracts in a contango market, and some are structured as partnerships that issue a Schedule K-1 at tax time. A fund's prospectus explains its method.
Reading oil headlines
A short checklist helps: which benchmark is being quoted; whether a move is driven by supply news, demand news or the dollar; what weekly EIA inventories are showing; and whether the futures curve is in backwardation or contango. Those four questions explain most of what moves oil on any given day, and the EIA's free "Energy Explained" pages are a reliable reference for everything else.
This article explains how oil markets work and is not investment advice. Consider your own circumstances and consult a licensed professional before acting.
Frequently asked questions
What is the difference between WTI and Brent?
West Texas Intermediate is a light, sweet US crude whose benchmark futures contract is delivered at Cushing, Oklahoma. Brent is the benchmark for crude from the North Sea and much of the world's seaborne oil. The two usually trade within a few dollars of each other, with the gap reflecting transport costs, quality and regional supply.
How did oil prices go negative in 2020?
In April 2020, as pandemic lockdowns collapsed demand, the expiring May WTI futures contract settled below zero. Holders who could not take physical delivery at Cushing, where storage was nearly full, paid others to take the contracts off their hands. It was a feature of a physically delivered contract at an extreme moment, not a sign that oil itself had negative value everywhere.
Why don't gas prices fall as fast as oil prices?
Crude oil is the largest single component of the retail gasoline price, but refining costs, distribution and marketing, and federal and state taxes make up the rest. Retail prices also adjust with a lag as stations sell existing inventory, and local supply problems at refineries can keep prices high even when crude falls.
