10 Oil Industry Terms Every Investor Should Understand

With the collapse of oil prices making lots of headlines lately, many investors are considering an oil investment for the first time. Unfortunately, some of the industry terminology can be pretty confusing for a novice. Here’s a list of 10 words, phrases and metrics commonly used in the oil industry.

Oil shale: a fine-grained sedimentary rock that can contain shale oil, a substitute for conventional crude oil.

British Thermal Unit (BTU): a unit of energy used in the oil and gas industry equal to the amount of energy required to heat or cool one pound of water by one degree Fahrenheit.

Hydraulic fracking: extraction technique in which high-pressure fluid is injected into a wellbore with the intention of cracking rocks deep underground and releasing trapped crude oil and natural gas.

Crack spread: the difference in price between a barrel of crude oil and the petroleum products that a refiner extracts from the crude oil.

Octane rating:  a measure of how much compression a fuel can withstand before igniting (seen on the pumps at gas stations; the higher the octane rating of the gasoline, the better a gasoline engine will perform).

Barrel of oil equivalent (BOE): unit of energy equal to the approximate amount of energy obtained from burning one barrel of crude oil.

Sweet/sour: refers to the sulfur content of crude oil; higher quality sweet crude oil contains less than 0.5 percent sulfur.

Light/medium/heavy: refers to the density of crude oil, as measured by API gravity; light oil flows freely at room temperature.

West Texas Intermediate (WTI): grade of light, sweet crude oil used as a benchmark in oil pricing  and used as the underlying commodity of the Chicago Mercantile Exchange’s oil futures contracts.

Brent crude: grade of light, sweet crude oil extracted from the North Sea and used to price two thirds of the world’s internationally-traded crude oil.

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Whether you buy an oil ETF such as the United States Oil Fund ETF USO, a general energy ETF such as Energy Select SPDR Fund XLE or the stock of a major oil company such as Exxon Mobil Corp XOM, understanding these 10 industry terms will ensure you know exactly what is going on in the world of oil.