The first factor is density, measured by API gravity (light versus heavy). A higher API gravity indicates lower density and therefore lighter crude oil. Light crude oil is like vegetable oil, while heavy crude is like peanut butter.
Lighter crude flows more easily and can be transported through pipelines with greater efficiency than heavier crude. As such, it is also easier to refine and can be made into high-value end products such as gasoline, diesel and jet fuel. In contrast, heavy crude requires more energy-intensive refining processes, making it pricier overall.
The second factor is the sulphur content of the crude oil, which categorises it as either sweet or sour. Sweet crude contains less than 1% sulphur, while sour crude typically contains between 1% and 2%. Sweet crude is generally easier and less costly to refine, similar to light crude, and therefore tends to command a premium over sour or heavier grades.
See also: Oil drops as Trump pushes back timeline for Iran energy strikes
The diagram above illustrates the range of crude oil grades across regions and major producing countries. Globally, three primary benchmarks are used to price crude oil: North Sea Brent, West Texas Intermediate (WTI), and Dubai/Oman. Brent crude is the most widely used benchmark, pricing oil across Europe, Africa, the Mediterranean, and parts of Asia, including Australia. It is typically associated with light, sweet crude.
WTI is primarily used to price US light, sweet crude, with Cushing, Oklahoma, as its main trading hub. It also serves as a reference for imports from regions such as Canada and Latin America. The Dubai/Oman benchmark is commonly used for Middle Eastern crude and is widely referenced by Asian refineries. Unlike Brent and WTI, it is generally classified as medium and sour. With approximately 60% to over 70% of Asia’s crude imports originating from the Middle East, the Dubai/Oman benchmark remains critical to the region’s energy supply.
See also: Iran oil revenue soars as it’s the sole exporter out of Hormuz
Market forces that affect oil prices
Like many commodities, both the supply and demand for crude oil play a large role in influencing the overall price. In 2023, global oil production stood at approximately 102.666 million barrels per day, while world oil consumption was 101.249 million barrels per day. This relatively narrow margin highlights the delicate balance between supply and demand in the oil market.
There is limited flexibility to increase long-term supply significantly. Global capital expenditure in the oil and gas sector has declined over time, partly due to environmental considerations and the transition towards cleaner energy sources. As a result, the market is more sensitive to disruptions.
Supply shocks often take the form of geopolitical conflicts, such as infrastructure attacks, unexpected production cuts, and policy shifts. For example, the 1973 Arab oil embargo and the supply disruptions experienced during the Covid-19 pandemic in 2020. Demand shocks, on the other hand, are typically influenced by macroeconomic conditions, geopolitical tensions, and global crises. For instance, conflicts such as the Russia-Ukraine war and tensions involving Iran have driven higher oil demand amid increased uncertainty and energy security concerns. Conversely, the Covid-19 pandemic led to a sharp decline in global demand as economic activity slowed significantly.
Iran conflict and supply shock
On Feb 28, the US and Israel launched coordinated strikes on Iran, targeting military infrastructure, leadership, and elements of its nuclear programme. While the initial focus was on strategic assets, Iran’s response escalated tensions across the region, raising concerns over disruptions to global oil logistics.
Iran retaliated by targeting key energy infrastructure across the Gulf, including facilities in Saudi Arabia, Qatar, the UAE and Oman. These actions disrupted production and signalled heightened risks to regional oil supply.
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Of particular concern is the Strait of Hormuz, a critical maritime route through which a significant portion of the world’s oil supply is transported. Iran has threatened to restrict passage through the strait, creating fears of a major supply bottleneck. Any sustained disruption could severely impact global oil flows, particularly for Asian economies that rely heavily on Middle Eastern exports.
As a result, oil prices surged sharply. By March 9, Brent crude reached approximately US$119.50 per barrel, while WTI rose to around US$119.48 per barrel, marking significant increases from pre-conflict levels.
Interconnectedness of oil and world economies
Global economies remain heavily reliant on crude oil, with consumption estimated at approximately 104 million barrels per day in 2025, a 0.7% increase from 2024. Crude oil and its by-products fuel not just the oil and gas industry, but global logistics, travel, construction, and even everyday products. While countries such as the US, Germany, Japan and members of the International Energy Agency (IEA) have released strategic reserves to ease short-term supply disruptions from the Iran conflict, these measures are temporary and do not resolve underlying supply risks.
How companies manage oil price volatility
Industries highly exposed to fuel costs, such as airlines and cruise operators, typically adopt hedging strategies to manage price volatility. More disciplined firms may hedge around 60% of their fuel costs over periods ranging from six months to two years. In contrast, companies that do not adopt hedging practices will be greatly affected, likely seeing their fuel costs effectively double, resulting in thinner margins or even losses.
Potential inflationary pressure on Singapore
Sustained elevated oil prices could exert inflationary pressure on Singapore, which is highly dependent on imports. Higher energy costs would directly impact sectors such as utilities and transport, with knock-on effects across food, retail and construction.
Petrol prices have already risen, with 95-octane fuel increasing from $2.88 to $3.35 as of March 13, reflecting a notable increase following recent geopolitical developments. Prolonged high oil prices may contribute to higher living costs and broader inflationary pressures.
What can investors do in times of volatility and oil price hikes?
Having proper risk management and asset allocation is key to long-term investing, especially during times of uncertainty. Most investors only care about maximising returns, with the saying “High Risk, High return, no Risk, No Return”. The correct approach is to maximise risk-adjusted returns rather than returns alone. By gaining exposure to assets like gold, bonds, and other defensive stocks that are traditionally negatively correlated with risk assets (equities and indices), investors can achieve a higher risk-adjusted return. Depending on individual circumstances, a typical allocation to defensive assets may range between 10% and 40% of a portfolio. Regular portfolio rebalancing, conducted periodically throughout the year, helps maintain discipline and alignment with long-term investment objectives.
Crude oil remains one of the most strategically important commodities in the global economy. Price fluctuations can quickly ripple through financial markets and impact economic stability.
For investors, understanding the dynamics of the oil market is essential in navigating periods of uncertainty. A disciplined approach to risk management and portfolio construction can help build resilience and support long-term wealth creation.
Hei Tung Sam is a dealing manager at PhillipCapital
