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The Price is Right - North America Crude Oil Price Differentials Explain and Foretell Market Shifts

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.

There are many crudes traded across North America, each with its own density (measured in API degrees), sulfur content (measured in percentages), total acid number (TAN), and other qualities. The value of all these crudes, with names like Midland Sweet (MIDSWT), Magellan East Houston (MEH), Mars, Bakken, West Texas Light (WTL), and Western Canadian Select (WCS) are typically quoted as differentials to the price of DSW deliverable on the NYMEX Cushing contract (see Trading in the USA).

It is well-known and understood in the rarified world of U.S./Canadian crude oil traders that the behavior of those differentials can explain a lot about what is happening to crude oil production, transportation volumes, the ups and downs of storage, and — so important today — exports. But to make use of that window on crude markets you’ve got to have access to the data, have the means to put current price behavior in a historical perspective, and have the expertise to interpret what it means when differentials widen, narrow, flip (premium vs. discount), or blow out. Other than those rarified U.S./Canadian traders referenced above, most mortals are oblivious to these insights. Until now.

Warning: Today’s blog is an unabashed advertorial for TradeView: Crude Oil Price Analytics, a new report and dataset developed by RBN and Link Data Services (LDS), the data provider arm of Link Crude Resources, the leading Gulf Coast physical crude brokerage firm. More about LDS in a minute. For now, suffice to say that LDS provides data and insights about what makes physical crude oil markets move. RBN does the data analytics, interprets the trends and prepares an understandable explanation of what is going on in the markets. The idea is to put U.S./Canadian crude oil trades in a context that anyone can wrap their head around, and provide real value to a wide range of market participants and market followers — from those rarefied physical oil traders to market analysts, business development folks, and global players who are not intimately familiar with the peculiarities of U.S./Canadian crude markets.

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