What Is the OPEC Basket?
Let me explain what the OPEC Basket is. It's a weighted average of oil prices from different OPEC members around the world. As a member of the Organization of the Petroleum Exporting Countries (OPEC), each country contributes data that forms this basket. You can think of it as a benchmark or reference point if you're monitoring oil prices and the stability of the global oil market.
You might also hear it called the OPEC Reference Basket (ORB) or the OPEC Reference Basket of Crude.
Key Takeaways
- The OPEC Basket is a weighted average of oil prices from the different OPEC members around the world.
- The main use of the OPEC Basket is setting and achieving OPEC price targets.
- Since it is just an average, an OPEC Basket is not a type of crude oil that businesses can buy directly.
Understanding the OPEC Basket
The OPEC Basket relies on specific petroleum blends from OPEC member countries, and it's calculated as a weighted average. A weighted average means you calculate the mean by assigning values based on some attribute—in this case, the weight of the crude oil.
As of December 2020, the basket averaged prices from crude oils of thirteen member states. These include Saharan Blend from Algeria, Girassol from Angola, Djeno from Congo, Zafiro from Equatorial Guinea, Rabi Light from Gabon, Iran Heavy, Basra Light from Iraq, Kuwait Export, Es Sider from Libya, Bonny Light from Nigeria, Arab Light from Saudi Arabia, Murban from the United Arab Emirates, and Merey from Venezuela.
Some OPEC oils have higher sulfur content than crudes from other countries. Crude with higher sulfur is more expensive to refine, so the OPEC Basket price is generally lower than other reference prices. Remember, crude oil with excessive impurities isn't suitable for many uses unless extensively processed.
Many other countries produce oil but aren't OPEC members—think Russia, the United States, China, and Canada. OPEC members produce a substantial fraction of the world's oil. Oil prices impact the global economy heavily because petroleum drives production and distribution of goods, from trucks transporting items to tractors in fields and cars for consumers. OPEC helps its members create stable market conditions by adjusting production levels.
The OPEC Basket vs. Other Crude Oil Benchmarks
There are many crude oil benchmarks out there, representing over 200 varieties that differ in price and quality. Here are a couple of leading alternatives to the OPEC Basket.
West Texas Intermediate (WTI) is a lighter, higher-quality oil that sells for about $5 to $6 more than the OPEC Basket. The Brent blend from the North Sea, refined in Northwestern Europe, goes for about $4 above the OPEC Basket price.
Benefits of the OPEC Basket
The primary use of the OPEC Basket is for setting and achieving OPEC's price targets. When you hear news about OPEC raising oil prices, that's the OPEC Basket price they're referring to. There's competition among crude oils since they're often substitutes, but OPEC's goal is to increase the price they get for their oil. As a weighted average of members' prices, it's perfect for setting goals and measuring success.
Criticism of the OPEC Basket
Since it's just an average, you can't buy the OPEC Basket directly as a type of crude oil. Instead, businesses buy specific oils like Kuwait Export or Arab Light, which vary in price and quality. This makes the basket not very useful for oil refineries.
Real-World Example of the OPEC Basket
On April 26, 2018, the OPEC Basket was at $71 per barrel, showing a steady rise from $66.80 a month earlier on March 26. A year before that, it was about $51.47 and had been rising throughout 2017.
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