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Trading in the USA - Pulling Back the Curtain on North America's Crude Oil Trading Market

Trading in the highly integrated US/Canadian crude oil market is undergoing a profound transformation, driven mostly by the pull of exports off the Gulf Coast. But the shifts in flows, values and even the trade structures being used today are not well understood outside a small cadre of professional traders and marketers. Consider a few examples: Domestic sweet oil traded at Cushing on NYMEX is not West Texas Intermediate — WTI at Cushing has averaged a hefty $1.80/bbl over NYMEX for the past year. Most spot Houston and Midland crudes trade as buy-sell swaps. WTI in Houston trades at a discount to Corpus Christi and sweet crudes in Louisiana. Crude in Wyoming trades at a premium to Cushing. And the Gulf Coast is the highest-value market for Canadian heavy crude. This is not your father’s (or mother’s) oil trading game. Our mission in this blog series is to pull back the curtain on physical crude trading in North America, explain how it works, what sets the price, and who is doing the deals. 

Crude oil markets in North America are dynamic, interdependent, and uniquely built around the mechanics of physical pipeline deliveries. At the same time, they can be convoluted, arcane and quite opaque, even while appearing to be transparent. Increasingly, the price of oil in North America drives global markets. But what determines the price of crude oils in North America? Sure, at the macro level it’s the economics of production on the supply side, refined products on the demand side, crude import/export flows, transportation costs, and crude quality specs. But markets don’t trade at the macro level. Individual deals done between buyers and sellers are the real price makers, and it’s the workings of those deals that are generally misunderstood by many market participants, even those who buy and sell large volumes of physical barrels.

Most physical crude oil barrels in North America move under term contracts with formula prices, which are frequently based in part on indices from price reporters like Argus and Platts. But where do they get their prices? The spot market, of course. Oil trade data is aggregated by price reporters from a variety of market participants and is used to provide a daily market assessment of an array of crude oil grades that trade at various locations across North America.

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