Clash of the Titans - The New Eagle Ford Crude Oil Marker Price

On Friday (October 19, 2012), West Texas Intermediate (WTI) crude futures for delivery at Cushing, OK closed at $90.05/Bbl – some $20 below the price for the similar grade Light Louisiana Sweet (LLS) crude sold at the Gulf Coast. We believe that price differential will fall as new supplies of domestic and Canadian crude find their way to the Gulf Coast next year (2013). Supplies of South Texas Eagle Ford are already arriving at the Gulf and a new Platts Marker price shows them being priced against LLS. Today we look at the Eagle Ford marker price and what it means for the status of LLS versus WTI.

 

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Last week (October 16, 2012) Platts began quoting two new prices for Eagle Ford crude in South Texas in their daily crude oil market report. These quotes mark the first attempt to provide a market price for Eagle Ford that traders can reference in transactions. We previously looked at the issue in our blog series on Eagle Ford (see Knocking on Heaven’s Door – The Eagle Ford Story Part I) and found that a range of different crude API gravities complicated the pricing situation with many falling into the condensate category above 50 API degrees. When we looked at pricing at the Gulf Coast for Eagle Ford (see Heaven Sent Blend – A Mars/Eagle Ford Mix) we discovered that quality and pricing varied widely with no agreement on a standard crude oil yield that could be used to determine refining value.

Platts have published a two page guide to the rationale and methodology of their new Eagle Ford pricing (download a copy here). The first of these price assessments is a straight average of four company postings (for more on how postings work see The Bakken Buck Starts Here – Crude Pricing Part I). The postings index is simply an average of the current prices paid by refiners and marketers for crude sold at the wellhead.

The more important Platts price quote is called the Eagle Ford Marker - calculated as a differential (discount or premium) to Light Louisiana Sweet (LLS) crude. Because of the confusing range of crude qualities coming out of the Eagle Ford, Platts are using a quite sophisticated mechanism to calculate the Eagle Ford differential. Platts use a refinery yield calculation (see Refinery Yields Forever for an explanation of how refinery yields work) to arrive at the differential to LLS in their marker price for Eagle Ford. The box below provides detail on how the marker price is calculated. The new mechanism is designed to provide two things. First an acceptable “typical” specification for Eagle Ford and second a relative valuation for that specification against LLS. Platts are encouraging the industry to use the resulting marker price as a reference in Eagle Ford crude transactions. For example, an Eagle Ford sale by a producer to a refiner in Houston might be negotiated as a differential to the Eagle Ford marker based on higher or lower API specifications and transport cost from South Texas to Houston. 

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