Heightened U.S.–Iran tensions pushed Brent crude to $104 and West Texas Intermediate, WTI, to about $98.5 (26 March 2026). Brent, extracted directly from North Sea, is more exposed to global disruptions than WTI. Price differences create arbitrage opportunities.—quantvps.com
The Questions
- What are the varieties of crude oil?
- Who are the suppliers?
- Who are the buyers?
- Who are the oil market traders?
- How are the prices of Brent and WTI determined?
- How has the U.S.—Iran war affected the price gap between Brent and WTI?
- What is the Law of one price?
The Answers
1 . What are the varieties of crude oil?
Crude oil differs by how easy it is to refine and how clean it is.
– Light oil: easier to refine
– Heavy oil: harder to refine
– Sweet oil: low sulfur (less impurities, less pollution)
– Sour oil: high sulfur (more impurities, more pollution)
WTI and Brent are both light and sweet.
2. Who are the suppliers?
The supply of crude oil comes from major producing countries. These include members of Organization of the Petroleum Exporting Countries (OPEC), their partners in OPEC+, such as Russia, and non-OPEC producers like the United States. Oil production is carried out by both state-owned companies, such as Saudi Aramco, and private firms like ExxonMobil.
3. Who are the buyers?
The demand for crude oil comes mainly from refineries, which process crude oil into products such as petrol and diesel. It also comes from countries that do not produce enough oil and therefore import it.
4. Who are oil market traders?
Traders are market participants who both buy and sell oil, depending on where they see profit opportunities. They demand oil when they buy it in one market and supply it when they sell it in another. Their main activity is arbitrage, which involves buying oil where it is cheaper and selling it where it is more expensive.
5. How are the prices of Brent and WTI determined?
Oil prices are determined by the forces of supply and demand—by the supply of producers and traders, and by the demand of users and traders.
Table 1 and 2 show factors affecting the demand for and supply of WTI (Brent).
6. How has the U.S.—Iran war affected the price gap between Brent and WTI?
The figure below answers this question. It shows the movement of three variables over time: Brent crude oil prices (blue), West Texas Intermediate (WTI) prices (orange), and their price difference (green).
Both prices increased and the gap between them widened.
Normally, when a commodity has different prices in different locations, an arbitrage opportunity—buying at a low price and selling at a higher price– closes the gap.
Before February 28, 2026—the day the U.S.-Iran war began—stable geopolitical conditions and open shipping routes allowed arbitrage between WTI and Brent crude to operate smoothly, keeping the price difference small, with an average gap of about $6.4 (before February 28).
After February 28, shipping through the Strait of Hormuz became riskier and more expensive. Because Brent is more exposed to global shipping disruptions than WTI (which is more U.S.-based), Brent price rose faster than WTI, increasing the average price gap. With arbitrage harder to execute, the price gap did not decrease. Instead, it more than doubled from pre-war times, reaching $14.6.
7. What is the Law of one price?
The Law of One Price states that if an item is traded in more than one place, its price will be the same in both locations. If the item is cheaper in one market and higher in another, demand increases in the cheaper market (raising its price) and supply increases in the expensive market (lowering its price), until prices are equal in both markets. But because transporting the item has costs, the law may not hold perfectly—a price difference might persist.
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