Oil Futures Explained: What They Are, How WTI and Brent Work, and What Drives the Price

Oil futures defined An oil futures contract is a standardised agreement to buy or sell a fixed quantity of crude oil at a specified price on a future delivery date. The buyer agrees to take delivery (or cash-settle); the seller agrees to deliver (or cash-settle). WTI (West Texas Intermediate) and Brent crude are the two global price benchmarks. Most participants close their futures positions before delivery — but the possibility of physical delivery anchors futures prices to real-world supply and demand.

Table of Contents

1. What a Futures Contract Actually Is
2. WTI vs Brent: The Two Global Benchmarks
3. The NYMEX WTI Futures Contract (CL)
4. The ICE Brent Contract
5. Contango and Backwardation in Oil Markets
6. Why Oil Traded at Negative Prices: April 20, 2020
7. How OPEC+ Moves the Futures Curve
8. Who Uses Oil Futures and Why
9. Frequently Asked Questions
10. Key Takeaways

What a Futures Contract Actually Is

A futures contract is a promise. Two parties agree today on a price and a delivery date for a commodity that will change hands in the future.

Unlike buying crude oil on the spot market — where you pay now and receive oil within a few days — a futures contract locks in a price months or even years in advance. The actual payment and (potential) delivery happen at contract expiry.

Here is what makes futures useful for commodity markets:

• Price certainty: a refinery that wants crude oil delivered in December can lock in that price in August, removing uncertainty from its cost planning.
• Risk transfer: a producer who wants to guarantee a minimum selling price can sell futures now and deliver later, knowing exactly what they will receive regardless of where spot prices are in December.
• Price discovery: millions of transactions in the futures market aggregate information about supply and demand expectations, producing a forward price curve that the whole industry can observe and plan around.

Futures contracts are standardised — every contract specifies exactly the same quantity, quality, and delivery terms. This standardisation is what makes them tradeable on an exchange rather than requiring bespoke negotiation for every transaction.

WTI vs Brent: The Two Global Benchmarks

Most of the world’s crude oil is priced with reference to either WTI or Brent. Understanding the difference between them is foundational for anyone working with oil markets.

WTI (West Texas Intermediate)

WTI is a light, sweet crude oil produced primarily in the Permian Basin and other US production regions. It is delivered to Cushing, Oklahoma — a small town that has become the world’s most important inland oil trading hub, home to approximately 70–80 million barrels of storage capacity and connected to dozens of pipelines.

WTI is the benchmark for North American crude pricing. It trades on NYMEX (New York Mercantile Exchange, now part of CME Group) under the ticker CL.

Brent Crude

Brent is actually a blend of crudes from multiple North Sea fields: Brent, Forties, Oseberg, Ekofisk, and Troll (collectively called the BFOE basket). It is a light, sweet crude oil, similar to WTI in quality but physically located in the North Sea off the coasts of the UK and Norway.

Brent is the benchmark for approximately 60–65% of the world’s internationally traded crude oil — covering Europe, Africa, the Middle East, and much of Asia. It trades on ICE (Intercontinental Exchange) in London under the ticker B.

The WTI-Brent price differential

WTI and Brent are similar quality crudes, but they almost never trade at the same price. The difference between them (WTI minus Brent) — called the WTI-Brent spread — reflects:

• Pipeline and transport costs from Cushing (landlocked) to coastal export terminals
• North Sea crude availability and shipping logistics
• Relative US vs. global crude supply-demand conditions

Before the US shale boom, WTI typically traded at a slight premium to Brent. After 2011, when Permian Basin production surged and Cushing became pipeline-constrained, WTI traded at a significant discount to Brent (at times $20–25/barrel below). Pipeline expansions from Cushing to the Gulf Coast, plus US LTO (light tight oil) exports, gradually narrowed the differential. In 2025, the WTI-Brent spread typically runs $2–5/barrel, with Brent at a slight premium.

Feature	WTI	Brent
Grade	Light, sweet (~39 API, 0.24% S)	Light, sweet (~38 API, 0.37% S)
Exchange	NYMEX (CME Group)	ICE Futures Europe
Ticker	CL	B
Delivery	Cushing, Oklahoma (physical)	Financially settled (vs. Platts BFOE assessment)
% of world crude priced off this benchmark	~35% (North America)	~60–65% (international)
Contract size	1,000 barrels	1,000 barrels

The NYMEX WTI Futures Contract (CL)

The NYMEX Light Sweet Crude Oil Futures contract (ticker: CL) is the world’s most actively traded commodity futures contract by volume.

Contract specifications:

• Underlying: West Texas Intermediate (WTI) crude oil
• Contract size: 1,000 barrels
• Delivery point: Cushing, Oklahoma
• Delivery method: Physical delivery into pipeline systems or storage at Cushing (though most contracts are cash-settled or rolled before delivery)
• Price quotation: USD per barrel
• Minimum price move (tick): $0.01 per barrel = $10 per contract
• Contract months: listed monthly out to several years forward
• Trading hours: nearly 24 hours per day, 5 days per week (CME Globex electronic platform)

Expiry and rolling

Each monthly CL contract expires on the third business day before the 25th calendar day of the month preceding the delivery month. So the December contract expires in mid-November, and December delivery at Cushing begins December 1.

Most participants — refineries, traders, financial institutions — do not want to take physical delivery. They “roll” their position: before expiry, they close the expiring contract and open the next month’s contract. This roll is a cost if the forward curve is in contango (the next month is more expensive) and a benefit if the curve is in backwardation (the next month is cheaper).

The ICE Brent Contract

The ICE Brent Crude Oil Futures contract trades on Intercontinental Exchange’s London platform under the ticker B (ICE Brent).

Key differences from WTI:

• Financially settled: the ICE Brent contract settles against the Platts BFOE price assessment at expiry — meaning the final settlement is a cash payment based on the published spot price, not actual crude delivery. This makes Brent futures simpler to hold through expiry than WTI.
• North Sea origin: Brent reflects the supply-demand dynamics of North Sea crude plus the global crude market, without the Cushing storage constraints that can affect WTI.
• Global benchmark role: because 60–65% of internationally traded crude is priced off Brent, Brent futures are the more relevant global benchmark for most commercial buyers outside North America. Nigerian Bonny Light is priced at Brent +/- a differential; Saudi Arab Light’s formula price references Brent for European and Asian buyers.

Dated Brent vs Brent futures

A common point of confusion: Dated Brent (published by S&P Global/Platts) is the spot price for physical North Sea crude loading in the next 10–25 days. ICE Brent futures are forward contracts. The Brent futures curve reflects market expectations of where Dated Brent will be in future months. At contract expiry, the two converge.

Contango and Backwardation in Oil Markets

The shape of the oil futures curve — the relationship between near-term and longer-dated contract prices — tells you a great deal about current market conditions.

Contango occurs when longer-dated futures prices are higher than near-term prices. The forward curve slopes upward.

Contango typically occurs when:

• Physical oil supply is abundant (storage is filling)
• Demand is weak or uncertain
• Storage costs, financing costs, and insurance justify paying more for future delivery than for immediate delivery

In contango, a producer storing oil today can sell it forward at a higher price, covering storage and financing costs and locking in a profit. This is called a “cash-and-carry” trade. When storage fills up, contango sends a price signal to producers to reduce output.

Backwardation occurs when near-term futures prices are higher than longer-dated prices. The forward curve slopes downward.

Backwardation typically occurs when:

• Physical oil is in short supply relative to immediate demand
• Buyers are willing to pay a premium to get oil now rather than later
• Storage is not providing the usual “carry” benefit because oil in the near term is more valuable than oil in the future

Backwardation is often a signal of tightness in the physical market. It also creates a “positive roll yield” for commodity fund holders — as the expiring near-month contract (priced high) is rolled into the next month (priced lower), the fund benefits from selling high and buying lower.

Why Oil Traded at Negative Prices: April 20, 2020

On April 20, 2020, the May 2020 NYMEX WTI contract settled at −$37.63 per barrel — the only time in history that a major crude oil futures contract traded at a negative price.

This was not a market malfunction. It was the result of a specific physical constraint interacting with the mechanics of futures contract expiry.

What happened:

1. COVID-19 had collapsed oil demand globally. Lockdowns had grounded aircraft, emptied roads, and shuttered factories worldwide. Global oil demand fell by approximately 25–30 million barrels per day in April 2020 — an unprecedented drop.

1. Supply had not fallen to match. OPEC+ had not yet agreed on deep production cuts (that agreement was finalised on April 12, but cuts did not begin until May). US shale producers were still pumping.

1. Cushing storage was near capacity. As crude poured into the US and nowhere to send it (refineries running at low rates, exports limited), Cushing tanks filled rapidly. By mid-April, Cushing was estimated to be at 70–80% of working storage capacity and filling fast.

1. The May contract was about to expire. On April 20, the May WTI contract had one day left before expiry. Any contract holder who did not close their position by the end of trading on April 21 would be required to take physical delivery of 1,000 barrels of crude oil at Cushing — but Cushing was almost full. Anyone taking delivery would have no place to put the oil.

1. Sellers (shorts) had power; buyers (longs) had none. Contract holders scrambled to sell their May positions at any price rather than face physical delivery into a storage system with no capacity. Buyers knew this and bid aggressively low. The price collapsed below zero as sellers paid buyers to take the contracts off their hands.

The June WTI contract — not expiring that day — fell but did not go negative (settling around $20/barrel). The May-June spread (which was $50+ at one point) reflected the storage crisis: oil right now, at Cushing, had negative value because there was literally nowhere to put it. Oil one month from now, when some storage might have cleared, was worth $20/barrel.

This event was a textbook illustration of how physical commodity constraints interact with futures contract mechanics.

How OPEC+ Moves the Futures Curve

OPEC+ (the Organisation of the Petroleum Exporting Countries plus allied producers, primarily Russia) is the single most powerful price-moving entity in oil markets.

OPEC+ collectively controls roughly 40% of world crude oil production. When its members agree to cut production, global supply falls, physical barrels become scarce, and oil prices typically rise. When members agree to increase production or individual members cheat on quotas, supply increases and prices fall.

How OPEC+ announcements affect futures prices:

OPEC+ production decisions affect both the spot price and the shape of the forward curve.

• A production cut announcement typically causes the near-term futures curve to rise sharply (less supply coming imminently), while the long-dated curve rises less (the market assumes the cut is temporary and may be reversed). This steepens the backwardation in a tight market, or shifts a contango market toward flat/backwardation.
• A production increase announcement has the opposite effect: near-term prices fall as more supply is expected soon. If the market was in backwardation, increased production expectations can push it toward contango.

Key OPEC+ decisions and their market impact:

• April 2020: emergency cut of 9.7 million barrels/day agreed after COVID demand collapse. Did not prevent the May WTI negative price event (the cut started in May, too late for April) but stabilised markets in subsequent months.
• November 2022: agreed to cut by 2 million barrels/day as recession fears grew. Brent jumped $2–3/barrel on the announcement.
• April 2023: surprise additional cut of 1.16 million barrels/day announced outside a scheduled meeting. Brent rose approximately $6/barrel in the next trading session.
• 2024 extensions: OPEC+ repeatedly extended cuts through 2024 as demand growth disappointed, keeping prices supported in the $75–90/barrel range for Brent.

Market participants track every OPEC+ communication — ministerial statements, delegate briefings, news agency reports — as a leading indicator of supply and therefore futures price direction.

Who Uses Oil Futures and Why

Understanding who is in the oil futures market — and what they are trying to accomplish — helps explain price dynamics.

Physical hedgers: refineries and producers

Oil refineries buy crude oil to process into petroleum products. A refinery that plans to process 50,000 barrels/day over the next three months has massive crude cost exposure. By buying WTI or Brent futures for the relevant months, it locks in a purchase price, removing uncertainty from its margin planning.

Oil producers — E&P companies — sell crude oil. By selling futures forward, they lock in a minimum revenue level, protecting their cash flow for debt service and capital expenditure planning. US shale producers routinely hedge 30–70% of their expected production 12 months forward.

Airlines and other end-users

Airlines buy jet fuel, which is derived from crude oil. They hedge jet fuel prices directly (using jet fuel futures or swaps) or hedge crude oil as a proxy for jet fuel cost. Hedging allows airlines to set ticket prices and manage cash flow without being fully exposed to crude volatility.

Financial traders: speculators

Commodity hedge funds, commodity trading advisors (CTAs), macro funds, and bank proprietary trading desks take directional positions in oil futures based on their views on supply, demand, geopolitics, and macroeconomic conditions. Their participation is essential for market liquidity — without financial traders on the other side of hedger trades, the market would be far less liquid.

Index funds and passive investors

Large commodity index funds (tracking the Bloomberg Commodity Index, S&P GSCI) hold long positions in oil futures as part of a diversified commodity exposure. These funds roll their positions regularly (selling expiring contracts and buying the next month) and are a significant source of structural demand, particularly around roll periods.

Frequently Asked Questions

Can I buy and sell oil futures as an individual?

Yes, in principle. NYMEX WTI futures (CL) are available through futures brokers to individual traders. Each contract is 1,000 barrels — worth approximately $80,000 at $80/barrel prices — but the initial margin (deposit) required to hold one contract is typically $4,000–8,000. This leverage makes speculative oil futures trading high-risk for individuals. Most retail exposure to oil is through ETFs or CFDs that track oil prices indirectly, without the physical delivery obligation.

What is the “front-month” WTI contract?

The front-month contract is the nearest-dated actively traded futures contract — the one expiring soonest. When financial media quote “the WTI price,” they are almost always quoting the front-month contract. After it expires, the next nearest contract becomes the front-month. The transition creates the “roll” — the process of closing one month and opening the next.

Why do WTI and Brent sometimes diverge significantly?

The WTI-Brent spread widens when Cushing storage fills up (creating downward pressure on WTI relative to coastal-delivered Brent) or when US crude exports are constrained. It narrows when pipeline capacity allows easy movement of WTI-grade crude to Gulf Coast export terminals. Geopolitical events affecting North Sea supply or Middle Eastern crude (which is Brent-priced) can also widen or narrow the spread independent of US conditions.

What does it mean when oil futures are in “backwardation”?

When the oil forward curve is in backwardation, near-month prices are higher than longer-dated prices. This typically signals physical market tightness — buyers are paying a premium to get oil now rather than later. Backwardation often coincides with OPEC+ production cuts, supply disruptions, or seasonal demand peaks. It is generally considered a “bullish” curve structure. The opposite — contango — signals oversupply or weak demand.

How does the oil price affect freight rates?

Several mechanisms connect oil prices to shipping. Bunker fuel (heavy fuel oil or marine diesel) is derived from crude oil — when crude rises, bunker costs rise, increasing shipping operating costs and potentially pushing freight rates higher. More directly, oil market conditions affect the volume of crude oil and petroleum products shipped globally: OPEC production decisions affect tanker demand, refinery runs affect product tanker volumes, and US LNG and oil export levels affect tanker utilisation. An oil price analyst and a shipping analyst are reading many of the same underlying supply-demand signals.

What is “WCS” and how does it relate to WTI?

Western Canadian Select (WCS) is the benchmark for Canadian heavy oil — bitumen-derived crude from Alberta’s oil sands. WCS trades at a substantial discount to WTI, reflecting its heavier grade (lower API gravity, higher sulfur content) and the cost of shipping it from landlocked Alberta to US refineries. The WCS-WTI differential is a key market indicator for Canadian oil sands producers and for US Midwest refineries (which are built to process heavy crudes and therefore benefit from a wide WCS discount).

Key Takeaways

• An oil futures contract is a standardised agreement to buy or sell 1,000 barrels of crude oil at a set price and date; most positions are closed before physical delivery.
• WTI (West Texas Intermediate) and Brent Crude are the two global benchmarks: WTI prices North American crude (delivery at Cushing, Oklahoma); Brent prices approximately 60–65% of internationally traded crude.
• The NYMEX WTI contract (ticker CL) is the world’s most actively traded commodity futures contract; ICE Brent (ticker B) is financially settled against the Platts BFOE assessment.
• Contango (forward prices higher than near-term) signals oversupply or weak demand; backwardation (near-term prices higher than forward) signals physical tightness and is typically a bullish market signal.
• On April 20, 2020, May WTI settled at −$37.63/barrel — because COVID-19 had collapsed demand, Cushing storage was nearly full, and contract holders were forced to sell at any price to avoid mandatory physical delivery with nowhere to put the oil.
• OPEC+ production decisions are the single most powerful external influence on the oil futures curve, moving near-term prices sharply when announced and shaping the forward curve slope over subsequent months.
• Physical hedgers (refineries, airlines, producers) use oil futures to lock in costs and revenues; financial traders provide liquidity and take directional views on price direction.
• For trade and logistics professionals, oil futures prices directly affect bunker fuel costs, petroleum product trade volumes, and tanker freight demand — making oil futures literacy directly relevant to supply chain cost planning.

Related Reading

To deepen your understanding of the topics covered in this article, explore these related guides: the two benchmark contracts that dominate trading volumes, what happens when later-dated contracts trade above the front month, the opposite curve shape, where prompt barrels command a premium, the mechanics of taking or making delivery at contract expiry and how exchange-traded contracts compare with immediate physical deals.