Benchmark

In the early 2000s, prices for West Texas Intermediate (WTI) were becoming increasingly disconnected from global fundamentals. WTI reflected conditions in the Midcontinent at the Cushing, OK, crude oil storage hub, where bottlenecks repeatedly distorted its value. In today’s RBN blog, we look at how the problem contributed to the creation of the Argus Sour Crude Index (ASCI) 16 years ago, how the index has evolved and whether it remains relevant today. 

U.S. refiners have been enjoying some very good times the past couple of years. Most important, refining margins have soared due to a tight global product supply/demand environment brought on by, among other things, the post-COVID demand recovery, refinery shutdowns, Russia/Ukraine war effects, and high natural gas prices. Traditionally, the bulk of refining margins have come from (1) robust “crack spreads” (the general yardstick for measuring overall refining sector health, simply by taking the difference between a basket of refined products and key light sweet crude markets like WTI Cushing or MEH) and (2) the lower crude-input costs that many refineries benefit from, either because of location-related advantages or their ability to process lower-cost crude like medium and heavy sours. But location discounts have narrowed in recent years due to the buildout of pipelines and, as we discuss in today’s RBN blog, the big quality discounts that complex refiners relished through much of last year and the first few months of 2023 have withered. The question is, why?

There is no debate about it: The CME/NYMEX domestic sweet (DSW) crude oil futures prompt-month contract at Cushing, OK, is the most closely followed benchmark in U.S. energy markets. It’s the price quoted in nightly news reports and general media publications. And now, with U.S. exports of WTI deliverable on the Brent contract, domestic sweet at Cushing is arguably setting the price for crudes around the world. But the fact is, most crudes traded in physical markets across North America are not priced at the DSW-at-Cushing benchmark but instead at a differential to Cushing — higher or lower on any given day based on each crude’s unique quality, location, and supply/demand characteristics. In today’s RBN blog, we discuss how the behavior of differentials from the Cushing benchmark can go a long way to explain what is happening with crude oil production, transportation volumes, storage and, of course, exports.

Brent is by far the most important crude oil benchmark in the world, with well over 70% of all global crudes tied either directly or indirectly to the North Sea crude’s price. But the original Brent crude oil production is almost played out, with all of the offshore Brent producing platforms soon to be decommissioned. This might seem to be a big problem, but in the world of crude oil trading, it is a total non-issue, because Brent is no longer simply a grade of crude oil. It is a multi-layered matrix of trading instruments, pricing benchmarks, and standard contracts linked together by price differentials traded across a number of mechanisms and platforms that form the foundation of a robust, vibrant, and extremely important marketplace. Today, we delve further into the mechanics of the Brent complex, the key components that make it work, and the transactional glue that binds them together.

Do not try and refine the Brent; that's impossible. Instead, only try to realize the truth...there is no Brent. Then you will see it is not the Brent that gets refined; it is only yourself. For those who are not fans of The Matrix, that sentence may seem a little cryptic, but it makes a point that is little understood outside the rarified world of crude oil trading. The production of North Sea Brent crude oil is down to less than a couple of hundred barrels per day. Soon it will be gone altogether. But 70% of all crude oil in the world is tied either directly or indirectly to the price of Brent. How is that possible? Well, it’s because Brent is no longer simply a grade of crude oil. Over the past two decades, it has evolved into an intricate, multi-layered matrix of trading instruments, pricing benchmarks and standard contracts that is a world unto itself. A world with a huge impact across almost everything in today’s energy markets. Unfortunately, no one can be told what Brent is. You have to see it for yourself. So that’s where we’ll go in this blog series. Warning: To read on is like taking the red pill.

Next week (January 2016 - according to press reports) Enterprise Products Partners will load the first cargo of U.S. crude oil to be exported without regard to the regulations that restricted such movements to most countries except in certain circumstances for the past forty years. It looks like the lifting of crude oil export restrictions came too late to have much impact on U.S. production or prices in an era of free falling prices. Today we look at the impact of the change on the crude price spread between U.S. benchmark West Texas Intermediate (WTI) and international counterpart Brent.

Ever since crude oil prices began their precipitous fall in June 2014 market watchers have picked through the tealeaves of every OPEC statement - particularly those of Saudi Arabia - for signs of a change in policy. One widely watched signal comes every month when the Saudi’s publish differentials that determine the price customers pay for their crudes. Today we explain how Saudi pricing formulas work.