Two benchmarks, one market
Crude oil is not one substance. Grades differ by density (light or heavy) and sulphur content (sweet or sour), and refineries are built for particular diets. The market solves this with benchmarks that everything else is priced as a differential to.
Brent references North Sea crude and is the benchmark for the majority of internationally traded oil. It is cash-settled against a published index, which matters enormously — see below. WTI references US light sweet crude and is physically deliverable at a tank farm in Cushing, Oklahoma.
The day oil went negative
On 20 April 2020, the expiring WTI May contract settled at minus $37.63 a barrel. Demand had collapsed with the pandemic, Cushing storage was effectively full, and holders of physically deliverable contracts faced taking real barrels they had nowhere to put. They paid people to take the contracts off them.
Brent, being cash-settled, did not go negative. The episode is the clearest lesson available in why the settlement mechanism of a contract is not a technicality — it is the product.
Contango, backwardation and the roll
Futures for different months trade at different prices. When later months are dearer (contango), anyone holding a long position must repeatedly sell the cheap expiring contract and buy the dearer next one, bleeding value on every roll. When the curve is the other way round (backwardation), the roll pays you.
This is why long-run charts of oil ETFs look nothing like charts of the oil price. Over a decade of contango, an unhedged long oil fund can lose most of its value while the spot price is flat. It is the single most misunderstood feature of commodity investing.
How you would actually trade it
Retail exposure usually means an oil ETC, a CFD or a spread bet on the front-month future. In every case you are exposed to roll costs, not just the oil price — read the fund's methodology before assuming it tracks what you think it tracks.
The alternative is equity in producers, where you pick up reserves, management and dividends alongside the commodity, and in refiners, whose profits track the crack spread between crude and product prices rather than crude itself.
What goes wrong
- Geopolitics moves this market faster than fundamentals. A single OPEC+ statement or a strait closure can move price 10% in a session.
- Roll decay quietly destroys long-term returns in contango markets.
- Leverage. CFD and spread bet positions on oil are commonly offered at 10:1 or more.
- Physical delivery. Retail investors have been caught holding physically deliverable contracts into expiry. Know which kind you hold.
- Energy transition. Long-run demand is genuinely contested, and the capital cycle reflects that uncertainty.
This entry describes how a market works. It is not a recommendation, a price forecast, or advice about whether this belongs anywhere near your money. How entries are written.