As crude oil exports have become an integral part of US/Canadian trading, the market has evolved to accommodate this profound transformation. But the mechanisms used to price many of the most significant export grades are obscure and little understood outside a small cadre of professional traders and marketers. This is particularly true for the most liquid grades that employ a trading approach known as “exchange trading” or “spread trading,” in which volumes at regional hubs are valued in buy-sell transactions against domestic sweet crude at Cushing. In this context, “exchange trading” does not mean trading on a regulated exchange. Instead, it means trading via an exchange of barrels between buyer and seller. In today's RBN blog, we delve into some of the most complex aspects of this trading mechanism.
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As we discussed in Part 1 of this blog series, our mission is to pull back the curtain on physical crude trading in North America, explain how it works, what sets the price, and who is doing the deals. In that blog post we discussed how most physical crude oil barrels in North America move under term contracts with formula prices tied to CME/NYMEX domestic sweet and hub prices from price reporting publications, and how those publications derive their numbers from transactions in the physical spot trading markets. The convoluted aspect comes in the way the individual trades in those spot markets are structured.
A few things to note before we delve into the details. First, the exchange-traded grades at market hubs we are talking about are those most closely tied to exports. As shown in Figure 1, these include crude oils traded at Midland, Houston, Corpus Christi and Beaumont, as well as grades other than NYMEX DSW (Domestic Sweet) traded at Cushing and, to a lesser extent, LLS (Light Louisiana Sweet) and Louisiana offshore oils. (More on that Louisiana quirk in a minute.) Second, a number of other North America crude oil grades trade at differentials to NYMEX DSW but instead of using the exchange-trading mechanism, they settle against the NYMEX calendar month average (CMA), a topic that we last covered in Future(s) Games. (We’ll get back to that also in a moment.) Third, exchange-traded markets are primarily voice-brokered, meaning that the buyer and seller are matched by a human broker who facilitates the trade, helps structure the pricing mechanism and provides third-party documentation to the trading partners.
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About the song
“Living in the USA” was written by Steve Miller and appears as the fourth song on side one of the Steve Miller Band’s second studio album, Sailor. Released as a single in September 1968, it went to #49 on the Billboard Hot 100 Singles Chart. The song showcases Miller’s vocals and harp playing, which sometimes conjures up the ghost of Little Walter. Miller says he was inspired to write the lyrics to the tune by the trouble that led up to the riots at the Democratic National Convention in Chicago in 1968. For all you trivia freaks and gearheads, the cars you hear at the beginning and end of the song were twin small-block Chevy-powered rail jobs owned by Howard Cams and Lefty Mudersbach, recorded at Lion’s Dragstrip in Long Beach, CA. (Mudersbach won the race.) Now, somebody gimme a cheeseburger! Personnel on the record were: Steve Miller (lead vocal, harp, guitar), Boz Scaggs (guitar, backing vocals), Lonnie Turner (bass, backing vocals), Jim Peterman (keyboards, backing vocals), and Tim Davis (drums, backing vocals).
Sailor was recorded in August and September 1968 in Los Angeles, with Glyn Johns producing. Released in October 1968, the album went to #24 on the Billboard 200 Albums chart. It was the last album to feature contributions from original Steve Miller Band members Boz Scaggs and Jim Peterman. One single was released from the LP.
Steve Miller is an American musician and songwriter. He is the founder and only original member of the Steve Miller Band, which he founded in 1966. Miller started his professional career in the blues and moved toward a more pop-oriented sound during the mid-1970s. Les Paul, who was a close friend of Miller’s parents, is his godfather. After playing blues in Chicago, Miller, drawn by the growing music scene in San Francisco, relocated there in 1966 and formed the Steve Miller Band. He has released 18 studio albums, six live albums, 11 compilation albums, and 30 singles. Thirty members have passed through the Steve Miller band since its inception. Miller continues to tour.
