Lots of people talk about the price of West Texas Intermediate crude oil at Cushing, OK. But few producers and royalty owners receive that price. In today’s blog we delve into the secret black art of crude oil pricing, focusing on the Bakken. In Part I of our tutorial on crude oil pricing we will cover the mysteries of crude oil “postings” – which is one of the two major mechanisms that determine the prices paid for crude being produced from the oil rich Bakken shale play. (The other mechanism is spot purchases at major trading hubs, and will be the subject of a later installment.) This blog will be the first in a series designed to uncover how crude is priced, what the transportation costs are and how refiners determine the profitability of processing one crude versus another.
Crude Oil Postings
Pipeline transportation companies such as Plains All American and a number of US domestic refiners “post” the prices they are willing to pay for crudes such as Bakken, delivered to pipeline systems on a daily basis. In the YeeHaa days of refining, these posted prices used to be nailed to a fence post at the refinery gate (hence the term posting). Nowadays they are published on websites. Here is a link to the Plains All American Pipeline Company crude postings page where you can download posted prices if you are interested:
http://www.paalp.com/Customer-Center/Crude-Oil-Price-Bulletins-1363.html
If you want to receive the postings data from all the posting companies electronically every day, you can arrange to do so via our friends at OPIS and through data aggregation services such as Morningstar Commodity Data. Let us know if you are interested by sending an email to info@rbnenergy.com and we will be happy to connect you.
For today’s tutorial we are going to use a small sample from a Plains crude posting sheet to help explain the process. See the example snippets in the boxes below to follow along. Crude oil posters usually list crude types by location (frequently the state) and a common description for the crude. In our example the state is North Dakota and the crudes listed are Williston Basin Sweet and Williston Basin Sour – both crudes from the Bakken shale.
One of our example crudes is sweet and the other is sour. The terms sweet and sour refer to sulfur content. Sour crudes have higher sulfur content than sweet crudes. There are two things to know about sulfur. First refiners don’t like it because it costs more to process (in order to meet progressively lower sulfur content standards from EPA). Second, it stinks – hence the term sour.
If you are new to crude oil you need to stop and take a note here. Not all crude oils are made the same. Suffice to say that there are hundreds of varieties of crude oil and each one is slightly different. Or a lot different. How they differ and what their key qualities are a primary determinant of the prices the crudes will bring on the open market. How this works is a subject for a later installment in our story.
Aside from the location and the crude name, posted prices have three elements.
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