Global trade in crude oil is dominated by futures markets, wherein users such as refineries lock up supplies today at a fixed price for delivery at some time in the future. Supplies have traditionally been considered fungible, meaning that the source was essentially immaterial, and that oil from one supplier traded at the same price as oil of equal quality from anyone else.
A fascinating disparity has developed recently, resulting in widely divergent prices for crude oil futures depending upon geography.
Customers are presently paying substantially different prices depending upon where they are located. This imbalance reflects the rapidly changing dynamics of North American oil production and the resultant transportation bottlenecks impeding the efficient distribution of supplies.
Two main contracts have traded since the 1980s: Brent crude and West Texas Intermediate. Brent crude oil is a classification of low-sulfur petroleum grades that come from the North Sea, Africa and Europe. Refineries in the Eastern United States typically procure their supplies via the Brent contract.
West Texas Intermediate is a nearly equivalent grade of U.S. petroleum used by refiners on the Texas and Louisiana gulf coast and in the Midwest. Ordinarily, the price differential has been quite small. This relative parity has been upended over the past couple of years by the surge in North American oil production.