Module 3: Crude Oil Markets

Topics in Module 3 Include:

Module 3.1 — Crude Oil Market Overview, Export Drivers and Constraints

Presenter: TJ Braziel

Whether you want to focus on crude oil, natural gas, or NGLs, to understand how U.S. energy markets behave, it is imperative you first understand the fundamentals of the crude oil market. To do this, you need to understand what’s happening with production, imports, exports, refinery demand, storage, pricing, and how they all interact with each other. This section covers the fundamentals of the energy industry’s most popular commodity, crude oil, so you can build a better understanding of how it drives the decision-making process for all other energy commodities.

Module 3.2 — Permian Crude Infrastructure, Flows and Constraints

Presenter: Jason Ferguson

The Permian Basin is the preeminent crude oil-producing basin in the U.S. and the poster child of the Shale Revolution. The meteoric rise of production from the region in the last 10 years has been one of the key drivers of the domestic market. But that growth has not come without some hiccups along the way. This module is a deep dive into Permian oil production and pipeline takeaway capacity, as well as how pipeline constraints have impacted the prices Permian producers receive for their crude oil. It also looks at the buildout of new Permian crude oil pipelines, what that might mean for Permian prices, and how the new pipelines are likely to impact the volume and direction of oil flowing out of the Permian Basin.

Module 3.3 — Crude Quality: Implications for Prices, Pipelines and Refining

Presenter: Robert Auers

All crude oils are not created equal. Some are light (high API gravity), and some are heavy (low API gravity). Some are sweet (low sulfur content), and others are sour (high sulfur content). But that does not begin to scratch the surface of all the factors that refiners must consider regarding crude quality. Critically important is the potential mix of end products that various crude grades may yield. This module explains the defining characteristics of crude and describes the regional differences in the qualities of crudes produced and refined.

Module 3.4a — Fundamentals of Refining: Units, Processes and Products

Presenter: Robert Auers

To understand the fundamentals of refining, we must expand the conversation of crude quality that began in Module 3.3 to look at the basic characteristics of refiners — they’re not that much different than moonshiners! We’ll also discuss the U.S. supply-and-demand equation — total crude supply (production plus imports) has to equal total demand (refinery inputs plus exports), and while there are such things as inventory and statistical adjustments, these have to balance week-to-week and month-to-month. We’ll look at the U.S. surplus of light oil that needs to be exported; refinery demand that has been extremely variable over the past 18 months because of COVID issues; the U.S. desire for medium- and heavy-grade imports (especially from Canada) to meet refinery demand; and how production has been slow to respond over the past year and a half or so.

Module 3.4b — Lab Model: Petroleum Product Prices and Crack Spreads

Presenter: Robert Auers

There are two primary factors that influence refinery profitability: how much the refined products are sold for and how much it costs to make those products. In this model, we simplify the refiner’s economics, distilling all the inputs and outputs of refinery profitability into just four factors — the price of crude, gasoline, diesel and RINs — to come up with a representative difference between the cost of crude and the value of refined products called the “crack spread.”

Module 3.4c — Lab Model: Refinery Yields and Representative Margins

Presenter: Robert Auers

The crack spread is a helpful rule of thumb and market indicator, but it's a blunt instrument that relies on weighted prices for crude, gasoline and diesel. A yield model, on the other hand, provides more nuanced insights into which prices are affecting margins for a specific refinery setup. The model takes into account a representative yield of products that a sophisticated refinery might produce from various grades of crude under different configurations. It then calculates the refinery margin based on those weighted values, providing a much more comprehensive analysis.