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Kelly Criterion Method of Money Management

How Crude Oil Is Classified: Key to Commodities Investment Strategy

If you want to invest in the oil industry, you need to know what kind of oil you’re going to get for your money. Crude oil is classified into two broad categories: light and sweet, and heavy and sour.

A company involved in the production of light, sweet crude will generate more revenue than one involved in the processing of heavy, sour crude. This doesn’t mean you shouldn’t invest in companies with exposure to heavy, sour crude; you just have to factor the type into your investment strategy.

The two most widely used criteria to determine the quality of crude oil are density and sulfur content:

  • Density usually refers to how much a crude oil will yield in terms of products, such as heating oil and jet fuel. For example, a crude oil with lower density, known as a light crude, tends to yield higher levels of products. A crude oil with high density, commonly referred to as a heavy crude, will have lower product yields.

  • Sulfur content is another key determinant of crude oil quality. Sulfur is a corrosive material that decreases the purity of a crude oil. Crude oil with high sulfur content, which is known as sour, is much less desirable than a crude oil with low sulfur content, known as sweet crude.

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