Trading in the highly integrated US and Canadian crude oil market is undergoing a profound transformation, driven primarily by the attraction of exports to the Gulf Coast. But the changes in flows, values and even trading structures used today are not well understood outside of 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 $1.80/bbl over NYMEX over the past year. Most Houston and Midland spot crudes are traded as buy-sell swaps. WTI in Houston is trading at a discount to Corpus Christi and sweet crude in Louisiana. Wyoming crude trades at a premium to Cushing. And the Gulf Coast is the most valuable market for Canadian heavy crude. This is not your father’s (or your mother’s) oil trading game. Our mission in this blog series is to pull back the curtain on physical crude oil trading in North America, explain how it works, what sets the price and who makes the bids.
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 though they appear transparent. Increasingly, the price of oil in North America drives global markets. But what determines the price of crude oil in North America? Of course, at the macro level is the economics of production on the supply side, refined products on the demand side, crude import/export flows, transportation costs, and crude quality specifications . But markets don’t trade on a macro level. The individual bids made between buyers and sellers are the real price makers, and it is how these bids work that is generally misunderstood by many market participants, even those who buy and sell large volumes of physical barrels.
Most physical barrels of crude oil in North America are moved under forward contracts with formula prices, which are often based in part on indices from price reporters such as Argus and Platts. But where do they get their prices from? The spot market, of course. Oil trading data is aggregated by price reporters from various market participants and is used to provide a daily market assessment for a range of crude oil grades that are traded in various locations across North America.
