Houston, June 24, 2016 – Arguably the world’s most valuable commodity, crude oil is essential to modern life, the building block for everything from gasoline to guitar strings. Like other commodities, crude is governed by the theory of supply and demand. Producers produce, buyers buy, and, ideally, the price is good for both.
Which sounds simple, except there’s a hitch: because there’s no single type of oil, there can’t be a single, worldwide price for it, either. The unrefined petroleum pumped from the ground varies widely by region and crude stream; when it comes to the key characteristics that define crude oil quality and value — density and sulfur content — the product flowing from Mexico (which is heavy and full of sulfur) is about as far removed from the Malaysian type (light and almost sulfur-free) as the two countries are from each other on the map.
Light, sweet (low sulfur) crude is easier and less costly to refine into high-demand products like gasoline while heavier crudes require energy-intensive processing. And beyond those differences, there are plenty of other factors making the dynamics of oil pricing incredibly complex. Some variables, like the strength of local currencies and marketing and transportation costs, are common across global industries. Others – including geopolitical anxiety, cartel infighting, theft and sabotage by rebels, and even acts of nature like catastrophic wildfires – are less so.
In the 1980s, in order to simplify buying and selling crude in the international marketplace – and guarantee pricing transparency, the industry established benchmarks, a sort of pricing reference point. The two primary benchmarks are Brent crude and West Texas Intermediate, or WTI; nearly 200 more lightly traded references also exist.
Brent comprises light, sweet production from the North Sea and is used to price oil traded in Europe, Africa, Australia, and parts of Asia – roughly two-thirds of the world’s volume. WTI prices U.S. production as well as crude from Canada, Mexico, and South America. When we talk about the price of oil, we’re talking about the spot price of a barrel of one of the benchmark crudes.
“With expanded logistics at American oil trading hubs improving refinery access to domestic crude, and a supply-based rally raising WTI prices toward the $50 per barrel mark, it is time to reestablish WTI as the world’s oil price benchmark,” explained Canary, LLC CEO Dan K. Eberhart.
“The fact is, even before the price decrease, or the Brexit, the four fields in the North Sea that constitute Brent crude – the eponymous Brent, Forties, Oseberg, and Ekofisk – are literally drying up.”
Before 2011, Brent and WTI prices were closely aligned, with Brent prices typically trading at a slight discount to WTI, about $1.50 less, meaning WTI had a slim global advantage.
In 2011 and 2012, however, a glut of sweet, light domestic crude overwhelmed takeaway capacity at U.S. storage facilities. The build-up put so much downward pressure on WTI pricing that the relative positions of the benchmarks flipped; instead of WTI, Brent became the global oil price benchmark. But more significantly, the gap between the two benchmarks became more like a crevasse: at one point, WTI traded at $20 per barrel less than Brent.
Recently, though, WTI has been on the rebound. With expanded logistics at American oil trading hubs improving refinery access to domestic crude, and a supply-based rally raising WTI prices toward the $50 per barrel mark, the difference between the two benchmarks has narrowed again. In May, a mere $.20 per barrel separated them.
“The fact is, the four fields in the North Sea that constitute Brent crude – the eponymous Brent, Forties, Oseberg, and Ekofisk – are literally drying up.”
First exploited in the 1970s, they are mature fields where production fell from 420,000 barrels per day in 2009 to 260,000 barrels per day in 2014. The fields supplying Brent crude have long been in decline, but now, with the price drop & WTI-related shale levels increasing, drilling projects beyond 2017 are drying up.
That level of decline has scared off would-be investors who might have financed efforts to raise production in those fields. In contrast, during roughly the same period, U.S. production doubled to more than 9.43 million barrels per day, largely on the strength of new shale development. Shale will continue to alter the supply side of the world’s energy equation, particularly since the U.S. lifted its 40-year ban on crude oil exports. Couple that with increasing demand in Asian, especially among the Association of Southeast Asian Nations (ASEAN), that can be met by North American crude traded on WTI, and it becomes increasingly clear that Brent may no longer be the best choice as the basis for global oil pricing.
About Canary, LLC
After ten acquisitions and seven decades, Canary, LLC, is now one of the largest private wellhead service company in North America. Canary serves its clients and the public through quality drilling and production services, local charitable endeavors, and educational campaigns concerning energy policies. Visit canaryUSA.com, fb.com/CanaryConnects, or @CanaryConnects