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What is the purpose of crude oil benchmarking?
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Whenever we buy or sell anything, it is important to know the value as dictated by the market. For instance, if I sell a house in Texas, the price will typically reflect the price of other similar homes. However, the price may be higher or lower than similar homes based on specific amenities. Further, the price will also be specific to that area (i.e., the price won't reflect the price of homes in California).
It is the same with crude benchmarking. There are several benchmarks in different parts of the globe, and they are used as references for pricing. For example, if I want to buy oil in Texas that is similar to West Texas Intermediate (WTI) but has maybe a higher sulfur content, I would expect to pay somewhat less than the going price for WTI (all other factors being equal). So in a nutshell, benchmarks are there to provide a basis for pricing the numerous grades of oil around the world, and often prices are based on a formula that has as its basis a specific benchmark crude. A simple illustrative example is that the price of the fictional "Kansas Heavy Crude X" is contracted at West Texas Intermediate minus $15 per barrel.
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