Module 4 – Crude Oil Markets

Presenters: Rusty Braziel, Scott Potter & David Braziel

From 2010 to 2015, U.S. crude oil production grew almost 80%, eclipsing the growth rates of both natural gas and NGLs. As U.S. crude oil production grew and Canadian imports increased, overseas imports were backed out of North America. All of that new crude oil supply was hitting the market at the same time demand for petroleum products was slowing, and the result in late 2014 and early 2015 was a 50% collapse in crude oil prices. But by 2016, prices had started to recover and even more significantly, U.S. producers had improved their productivity enough to realize positive returns in several key basins, especially the Permian. As these developments played out, shifts have been seen in transportation infrastructure. Module #4 examines these developments and incorporates the basics of crude transportation and refining and also works through models for netback analysis, refinery analytics, and crack spreads.

4.1 North America Crude Oil Market Overview, Production Forecast, Pipeline Projects, and Crude Oil Quality. Reacting to low commodity prices and changing U.S. policy on exports, the oil patch has had to adapt to a new landscape for crude markets. Imports, exports, storage and refining have all been affected by these factors. The beginning of section one introduces these topics and conveys the magnitude of the shift in the industry. We then review RBN’s three production scenarios for the major producing basins in the U.S. We expand our view to look at the pipeline projects being developed to accommodate the increasing volumes across the U.S.  Finally, we’ll delve into crude oil quality. Not all crude oils are created equal and the proliferation of enhanced recovery techniques in the U.S. and Canada, has resulted in a wide range of crude qualities that affects the entire value chain. Upstream, midstream, and downstream markets have all had to adapt to the changing crude slate.

4.2 Model 4.1 – Crude Oil Transportation Rates and Netbacks. As production increases in places like the Permian basin, existing infrastructure can become constrained, putting pressure on local markets. In this model, we review in detail those dynamics and the effects on the pricing differentials between Cushing, the Gulf Coast, and the Permian. We talk about how producers can realize the best prices that will improve their economics, motivate them to drill more wells, which will mean more associated gas for our plant to process. We will walk through some simple crude oil netback calculations to understand what could happen to crude prices in Loving County where we are assessing that gas plant investment. 

4.3 Fundamentals of Refining. To make sense out of crude oil economics, it is important to understand the fundamentals of refining.  We begin by defining the crude oil refinery process and reviewing the basics of distillation, vacuum distillation, hydrocracking, cat cracking and coking. Lastly, we take a look at refinery profitability and its two major factors.  

4.4 Model 4.2 – Crack Spread. Using gasoline and diesel price markers and their relative weight against crude oil, the crack spread is how traders begin to think about crude refining margins. In this new RBN format, we introduce the basic concepts of the crack spread, its assumptions and how to calculate the crack spread.

4.5 Model 4.3 – Refinery Yields. One step beyond crack spreads, Model 4.3 tackles refinery yields and provides more insight as to which prices are affecting refiners’ margins – looking at both inputs and outputs from the refiners’ perspective.  Here we lay out a typical barrel yield and associated prices compared to a barrel of crude oil. We also look at crude oil quality and how its viewed differently by producers and refiners.