Oil: The World's Most Traded Commodity
Crude oil is the single most traded commodity in the world by value, and arguably the most important price in the global economy. It is a feedstock for transport fuels, plastics, chemicals, fertilisers, and hundreds of manufactured products. When oil prices spike, the effects ripple through virtually every sector of the economy — raising transport costs, manufacturing inputs, and eventually consumer prices.
Two benchmarks dominate global oil pricing. WTI (West Texas Intermediate) is the US benchmark, priced at Cushing, Oklahoma — the major pipeline hub that connects US oil-producing regions to refineries. WTI trades on the NYMEX exchange in New York. Brent Crude is the international benchmark, derived from North Sea oil fields and reflecting the price for oil delivered into global shipping lanes. Brent trades on ICE in London. Most oil outside the US is priced as a spread relative to Brent. The two benchmarks typically trade within a few dollars of each other, though the spread can widen significantly during supply disruptions.
OPEC and the Management of Supply
The Organization of Petroleum Exporting Countries (OPEC), formed in 1960 by Saudi Arabia, Iran, Iraq, Kuwait, and Venezuela (later expanded), was created explicitly to coordinate production levels among major oil-exporting nations — effectively a producer cartel. By managing the collective output of its members, OPEC can influence global supply and therefore oil prices. Its most dramatic intervention was the 1973 oil embargo, which quadrupled oil prices within months and triggered recession in the developed world.
OPEC's influence has evolved over the decades. The formation of OPEC+ — adding Russia and other non-OPEC producers from 2016 — represented an attempt to broaden coordinated supply management. However, OPEC's power to dictate prices has been fundamentally challenged by the shale revolution.
The Shale Revolution
From roughly 2010 onward, advances in hydraulic fracturing (fracking) and horizontal drilling unlocked vast reserves of tight oil (shale oil) in formations such as the Permian Basin, Eagle Ford, and Bakken in the United States. US oil production, which had been in structural decline since the 1970s, surged from around 5 million barrels per day in 2008 to over 13 million by 2019 — making the US the world's largest oil producer.
The shale revolution fundamentally altered the structure of the oil market. Shale wells can be drilled and brought to production in weeks rather than the years or decades required for deepwater or oil sands projects. This means US shale supply is highly elastic — it responds quickly to price signals. When prices rise above the break-even cost for shale (roughly $45-65 per barrel depending on region and vintage), new production comes online rapidly. When prices fall below break-even, activity drops quickly.
This elasticity effectively created a price ceiling for oil: whenever prices rise high enough to stimulate substantial new shale investment, additional supply arrives and moderates the price. OPEC's ability to simply raise prices by cutting output was significantly constrained.
Natural Gas: Regional Markets, Not One Global Price
Unlike oil, natural gas does not have a single global price. Gas is difficult and expensive to transport — it must be either piped or liquefied (LNG) for shipping, and the infrastructure costs mean that markets remain regional.
The key regional benchmarks are Henry Hub (the US natural gas pricing point, traded on NYMEX) and TTF (Title Transfer Facility, the Dutch hub that serves as Europe's main gas benchmark). Gas prices in Europe and Asia can be multiples of US prices during periods of tight supply — a divergence that became extreme in 2022 when Russian gas supplies to Europe were curtailed following the invasion of Ukraine.
The April 2020 Negative Oil Price
On April 20, 2020, WTI crude oil futures for May delivery briefly traded at negative $37.63 per barrel — an event that had never occurred before in the history of commodity markets. The cause was a specific intersection of physical and financial market mechanics: the Covid-19 pandemic had caused demand to collapse, global storage was near capacity, and traders who held expiring May futures contracts but had no ability to take physical delivery of oil at Cushing had to sell at any price — including paying someone to take the oil. The episode was a vivid demonstration of how futures contract mechanics and physical delivery constraints can produce extreme, apparently impossible outcomes.