An oil swap is a financial derivative that allows parties to exchange fixed oil prices for floating prices, or trade relationships between different oil grades and locations. These swaps enable producers, refiners, and traders to manage crude oil price risk without physical delivery requirements, providing flexible hedging and speculation tools.

Oil swaps can reference various crude oil benchmarks including WTI, Brent, or regional grades, and may include quality or location differentials. These instruments help manage basis risk between different oil markets and provide arbitrage opportunities for sophisticated traders. The oil swap market improves price discovery and risk management capabilities.

Real-world example: An airline enters an oil swap to pay fixed $75 per barrel while receiving floating Brent crude prices, hedging against jet fuel cost increases that correlate with crude oil price movements over the next 12 months.