A free handbook on how oil is actually graded, priced and sold. Why the price on the news is not the price anyone receives, what a differential is, and what private buyers are really being offered when someone sells them “oil”. No registration, no email required.
What this book is
Oil is the most quoted commodity in the world and one of the least understood by people outside the industry, because almost everything reported about it refers to a benchmark contract that very few barrels are actually sold under.
This is an educational handbook. It is not investment advice and it makes no offer. MultiGen’s oil division is in development and nothing here is a solicitation.
Chapter 1
What a barrel is, and which barrel they mean
A barrel is 42 US gallons — roughly 159 litres. The unit is older than the industry that uses it and it has not changed.
When a headline says oil is at a number, it almost always means one of two benchmark contracts:
| Benchmark | What it is | Why it matters |
|---|---|---|
| WTI (West Texas Intermediate) | Light sweet US crude, physically delivered at Cushing, Oklahoma | The US reference. Landlocked, so its price reflects US pipeline and storage conditions |
| Brent | North Sea crude, waterborne | The international reference, because it can be shipped anywhere |
These are reference prices for specific grades at specific places. A barrel produced somewhere else, of a different quality, sells for something else entirely. That gap has a name, and it is chapter three.
Chapter 2
Crude is not one product
Two properties do most of the work in deciding what a barrel is worth.
API gravity — light or heavy
API gravity measures density on an inverted scale: higher number means lighter oil. Light crude yields more of the high-value products — gasoline, diesel, jet fuel — with less processing. Heavy crude yields more residual material and needs more expensive refining. WTI sits around 39–40° API, which is light.
Sulphur — sweet or sour
“Sweet” crude is low in sulphur, conventionally under about 0.5%. “Sour” crude is higher. Sulphur has to be removed, that costs money and equipment, and refineries pay less for the privilege of doing it.
Light and sweet is the easy barrel. Heavy and sour is the cheap one. Neither is good or bad — they are different feedstocks for different refineries.
A refinery is built for a particular diet. One configured for heavy sour crude cannot simply switch to light sweet and profit, which is why quality discounts persist rather than arbitraging away.
Chapter 3
Differentials — why your barrel is not the benchmark barrel
The difference between a benchmark price and what a specific barrel actually fetches is the differential. It has two components and both are ordinary.
- Quality differential. Your crude is heavier, or sourer, or lighter and sweeter than the benchmark grade. The refinery prices that difference.
- Location differential. Your barrel is not at Cushing or on a North Sea loading berth. Getting it there costs money, and if pipeline capacity out of your basin is tight, that discount widens sharply.
This is the single most useful concept for anyone reading about oil. When a producer says they received well below the headline price, they are usually describing a differential rather than anything irregular.
Differentials move on their own, independently of the benchmark. A basin can see its realised price fall while the headline price rises, simply because takeaway capacity filled up.
Chapter 4
Where the money actually goes
This is the chapter that matters most.
Between the wellhead and the refinery gate, a barrel passes through gathering, transport, storage and marketing, and each takes a cut. The price a producer realises is the benchmark, minus the quality differential, minus transport, minus gathering and marketing fees. The headline number is the ceiling, not the outcome.
And a barrel is a physical object
This is what people forget. On 20 April 2020 the expiring WTI futures contract settled at minus $37.63 per barrel. Holders of contracts they could not offset faced physical delivery at Cushing with no storage available, and paid others to take the oil away.
The price went negative because the barrel is real. If you cannot store it, transport it, or refuse it, owning it is a liability rather than an asset.
That episode is the clearest possible demonstration that the barrel on the screen and the barrel in the ground are different things with different risks.
Chapter 5
How oil is actually bought and sold
| Route | Who uses it | Can a private buyer? |
|---|---|---|
| Term contracts | Producers and refiners, fixed volumes over time | No — industrial counterparties only |
| Spot cargoes | Traders moving physical crude | No — cargo-scale volumes |
| Futures | Hedgers and financial traders | Yes, but each WTI contract is 1,000 barrels and settles physically |
| Equities and funds | Anyone | Yes — but you own a company or a fund, not oil |
There is no retail channel for physical crude. Nobody sells you a barrel the way they sell you a gold coin, because a barrel requires tankage, transport, environmental compliance and a buyer with a refinery. If someone offers to sell you physical oil as a private individual, that is the moment to stop and ask what you would actually receive.
Chapter 6
What private buyers are actually offered
Since physical crude is not available at retail, what gets marketed to private buyers is almost always an interest in production. These are real instruments, and they are also where most of the trouble in this sector lives.
| Instrument | What you receive | What you carry |
|---|---|---|
| Royalty interest | A share of revenue from production | No operating costs, but no control and no say in whether the well is drilled |
| Working interest | A share of revenue | A share of costs, and potentially liability for operations |
| Mineral rights | Ownership of the minerals beneath a tract | Value depends entirely on whether anyone ever drills |
| Fractional programmes | A slice of one of the above, packaged | Fees, illiquidity, and whatever the sponsor’s paperwork actually says |
Two things to understand before anyone shows you a projection
- These are generally securities. Interests in oil and gas programmes are regulated as investment contracts in the United States. Anyone offering them to you should be able to say immediately how the offering is registered or exempt, and who is licensed to sell it. An answer that gets vague is the answer.
- A well is a wasting asset. Production declines from the day it starts, and in shale that initial decline is steep. A projection built on first-year output describes the best year you will ever have, not a typical one. Ask specifically for the decline assumption.
MultiGen sells physical goods. We do not offer royalty interests, working interests or fractional programmes, and nothing on this site is an offer of participation in any drilling venture.
Chapter 7
How buyers lose money
- Reading the headline as the realised price. Differentials and transport come off it before anyone is paid.
- Accepting a first-year decline curve as the run rate. The steepest production is always at the start.
- Not asking how an offering is registered. If it is a security and nobody can explain its status, that is the whole answer.
- Confusing a royalty with a working interest. One has no costs. The other can call on you for capital.
- Buying mineral rights with no drilling in prospect. Minerals under land nobody intends to drill generate nothing.
- Assuming futures exposure is the same as owning oil. April 2020 settled that argument permanently.
Chapter 8
The buyer’s checklist
- Which benchmark is being quoted, and what the differential to it is
- API gravity and sulphur content of the actual crude
- Where the barrel is, and what it costs to move it to a buyer
- If an interest is offered: royalty or working, and in writing
- How that offering is registered or exempt, and who is licensed to sell it
- The decline assumption behind every projection you are shown
- What happens if the operator stops operating
In oil the honest questions are boring and specific. Anyone who answers them quickly has done this before.
Where to go next
MultiGen’s oil division is in development and not open. The other free handbooks: emeralds · gold · energy and compute.
Questions: 888-296-4870, Monday to Friday, 9am–6pm Central.
This handbook is educational. It is not investment advice, not a recommendation, and not an offer of participation in any drilling or production venture.
Prefer it in print? This handbook and the other three are collected and expanded in The Resource Handbook — 27 chapters, 61 pages, paperback $19.99. Everything here stays free online either way.