Module 3 - Crude Oil Markets

Topics in Module 3 include:

Module 3.1 – North American Crude Oil Market Overview

Presenter: TJ Braziel

Crude markets have been on a chaotic ride since early 2020. Things started when COVID-19 forced lockdowns around the country, causing fuel demand to tank. This ran crude prices into the gutter and producers had no choice but to halt drilling and shut wells. Next up was the busiest Atlantic hurricane season on record, which forced Gulf Coast production, demand, imports, and exports up and down like a yo-yo. We also had a presidential election, Winter Storm Uri and the Texas Deep Freeze – not to mention the industrywide influence of the push toward renewable energy solutions – all of which has had an impact on the fundamentals of crude oil markets and on prices. This module looks at what's driving the markets today, including the recovery from COVID and its aftershocks and how their impact on fuel demand around the world effects the U.S.

Module 3.2 — Permian Crude Infrastructure, Flows and Constraints

Presenter: Jason Ferguson

As the preeminent producing basin in the U.S. and the poster-child of the Shale Revolution the meteoric rise of production from the Permian basin in the last ten 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: Martin King

All crude oils are not created equally. 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 those crude characteristics and describes the regional differences in the qualities of crudes produced and refined.

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

Presenter: Martin King

To understand the fundamentals of refining, we must expand our 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, week-to-week and month-to-month these have to balance. 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. need for medium-grade imports to meet refinery demand, and how production has been slow to respond in 2021.

Module 3.4b — Crack Spread Model and Petroleum Product Prices

Presenter: David Braziel

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. We’re going to simplify the refiner’s economics in this model, distilling all the inputs and outputs of refinery profitability into just three factors — the price of crude, gasoline and diesel — 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 — Refinery Yield Model and Representative Margins

Presenter: David Braziel

The crack spread is a helpful rule of thumb and market indicator, but it's a blunt instrument relying on weighted prices for crude, gasoline, and diesel. A yield model, on the other hand, provides more insight 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, and calculates the refinery margin based on those weighted values, providing a much more comprehensive analysis.