Release date: May 20, 2020 | Next release date: May 28, 2020
North American crude oil prices are closely, but not perfectly, connected
The decline on April 20, 2020 in the price of the front-month New York Mercantile Exchange (NYMEX) West Texas Intermediate (WTI) futures contract was the largest and swiftest on record. Front-month WTI prices dropped as low as -$40.32 per barrel (b) on April 20 during intraday trading before closing at -$37.63/b. Prices have since recovered, with NYMEX front-month WTI prices closing at $31.82/b on May 18. The April 20 NYMEX WTI market event proved short-lived, but the incident is still useful for highlighting the interconnectedness of the wider North American crude oil market. In addition to the NYMEX WTI futures contract, several important North American crude oil spot price markers also fell below zero on April 20, including WTI Midland, Mars, West Texas Sour (WTS), and Bakken Clearbrook (Figure 1). Although these markers correspond to different types of crude oils and trade at different places around the continent, the integration of North American crude oil transportation infrastructure and the use of NYMEX WTI in formulas used to calculate some other prices all but ensured that the highly local shock to NYMEX WTI on April 20 was quickly felt throughout the North American market.
Although NYMEX WTI is the most heavily used crude oil price benchmark in North America, oil producers typically receive the price that most accurately reflects the local supply and demand conditions. NYMEX WTI is a highly liquid contract—with an average of more than 586,000 contracts traded during each business day in 2019—but its usefulness to crude oil market participants as a reference price for conducting transactions is limited by several factors. First, NYMEX WTI is geographically specific because it is physically redeemed (or settled) at storage facilities located in Cushing, Oklahoma, and so it is influenced by events that may not reflect the wider market. The April 20 WTI price decline, for instance, was driven in part by a local deficit of uncommitted crude oil storage capacity in Cushing. Second, NYMEX WTI is chemically specific, meaning to be graded as WTI by NYMEX, a crude oil must fall within the acceptable ranges of 12 different physical characteristics such as density, sulfur content, acidity, and purity. NYMEX WTI can therefore be unsuitable as a price for crude oils with characteristics outside these specific ranges. Finally, NYMEX WTI is time specific. As a futures contract, the price of a NYMEX WTI contract is the price to deliver 1,000 barrels of crude oil within a specific month in the future (typically at least 10 days). The last day of trading for the May 2020 contract, for instance, was April 21, with physical delivery occurring between May 1 and May 31. Some market participants, however, may prefer more immediate delivery than a futures contract such as NYMEX WTI provides. Consequently, many market participants will instead turn to shorter-term spot price alternatives.
Taken together, these attributes help to explain the variety of prices used in the North American crude oil market. These markers price most of the crude oils commonly used by U.S. buyers and cover a wide geographic area, from Alberta’s heavy, sour Western Canadian Select (WCS)—widely used by Midwest refiners—to Texas and New Mexico’s light, sweet WTI Midland—the benchmark crude oil for many producers in the Permian Basin—and Mexican state-owned oil company PEMEX’s flagship heavy, sour Maya blend (Figure 2).
We can learn more information about the current structure of the North American crude oil market by examining the price difference (or spread) between crude oils in different crude oil markets. Three markets are particularly noteworthy: the inland markets of Petroleum Administration for Defense Districts (PADDs) 2 and 3, consisting of the interior of Texas, Oklahoma, and New Mexico; PADD 2, consisting of the rest of the Midwest and crude oil delivered from Western Canada; and the Gulf Coast of PADD 3, consisting of the refinery centers and maritime crude oil terminals along the coasts of Texas and Louisiana.
Within the inland markets of PADDs 2 and 3, the most important spreads are arguably those against the NYMEX WTI price. Historically, the spot WTI Midland price—which reflects supply and demand conditions in the Permian Basin region—has been lower than NYMEX WTI due to the downward price pressure exerted by the rapid expansion of crude oil production in the Permian Basin amid insufficient pipeline capacity. Between 2010 and 2019, WTI Midland traded at an average price discount of $2.24/b to NYMEX WTI, periodically trading at more significant discounts (reaching $17.90/b as recently as September 2018) as new production outpaced the capacity of the region’s crude oil pipelines to transport it to buyers. The completion of several pipelines such as Plains All American’s Cactus 2, Phillips 66’s Gray Oak, and the Epic Crude Oil Pipeline, however, has helped ease the capacity bottlenecks in the Permian, resulting in the near disappearance of the spread between the WTI Midland and NYMEX WTI prices. Consequently, WTI Midland and NYMEX WTI traded closely together for the first few months of 2020, with the WTI Midland price averaging a modest $0.81/b barrel premium over NYMEX WTI for the first two months of the year.
A similar situation played out initially in the PADD 2 crude oil market. As with the Permian, infrastructure constraints—and, to a lesser extent, quality differences—have played a major role in the market’s pricing dynamics. Without sufficient pipeline capacity to transport excess crude oil from Canada to the U.S. Midwest and Gulf Coast export facilities, Canada’s crude oil has been forced to rely on more expensive modes of transportation such as rail and trucking—the former of which transported 8% of Canada’s crude oil exports in 2019. Consequently, Canada’s crude oils, such as WCS, trade at steep discounts relative to crude oils produced from closer sources such as the Bakken Formation. WCS Hardisty traded at $58.06/b less than Bakken Clearbrook in May 2011 and $38.19/b less as recently as October 2018. To address this persistent discount, in December 2018 the Alberta Energy Regulator began requiring local producers to curtail their production of crude oil. As a result, the discount has gradually dissipated over 2019 and 2020, reaching $4.88/b as of May 13 and even briefly trading at a premium above Bakken Clearbrook of $46.85/b during the pricing event on April 20.
The Gulf Coast market is subject to similar supply and demand dynamics but with one key difference. Unlike PADD 2 and the inland parts of PADD 3, crude oil buyers in the U.S. Gulf Coast have relatively easy access to competing waterborne crude oils. For many market participants the key spread is against the price of Brent, a crude oil benchmark comparable with NYMEX WTI in terms of liquidity and quality. Prior to 2010, WTI grades were typically more expensive than Brent, but the increased volume of new light, sweet crude oils produced in the United States has exerted significant downward price pressure on WTI. As a result, and excluding the April 20 price shock, the price of WTI delivered at the crude oil terminal Magellan East Houston has averaged $2.14/b less than Brent since January 2020, compared with an average discount of $0.86/b in 2017, the earliest full year for which data are available.
U.S. average regular gasoline price rises, diesel price falls
The U.S. average regular gasoline retail price rose nearly 3 cents per gallon from the previous week to $1.88 per gallon on May 18, $0.97 lower than the same time last year. The Rocky Mountain price rose nearly 6 cents to $1.82 per gallon, the Gulf Coast price rose 4 cents to $1.54 per gallon, the Midwest price rose more than 3 cents to $1.78 per gallon, the West Coast price rose nearly 3 cents to $2.48 per gallon, and the East Coast price rose more nearly 2 cents to $1.83 per gallon.
The U.S. average diesel fuel price fell nearly 1 cent, remaining virtually unchanged at $2.39 per gallon on May 18, 78 cents lower than a year ago. The West Coast and Midwest prices each fell more than 1 cent to $2.89 per gallon and $2.23 per gallon, respectively, the East Coast and Rocky Mountain prices each fell nearly 1 cent to $2.49 per gallon and $2.34 per gallon, respectively, and the Gulf Coast price fell less than 1 cent, remaining virtually unchanged at $2.18 per gallon.
Propane/propylene inventories rise
U.S. propane/propylene stocks increased by 1.1 million barrels last week to 62.7 million barrels as of May 15, 2020, 7.7 million barrels (14.0%) greater than the five-year (2015-19) average inventory levels for this same time of year. Midwest, East Coast, and Rocky Mountain/West Coast inventories increased by 0.7 million barrels, 0.5 million barrels, and 0.1 million barrels, respectively. Gulf Coast inventories decreased by 0.3 million barrels.
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Retail prices (dollars per gallon)
| Retail prices | Change from last | ||
|---|---|---|---|
| 05/18/20 | Week | Year | |
| Gasoline | 1.878 | 0.027 | -0.974 |
| Diesel | 2.386 | -0.008 | -0.777 |
Futures prices (dollars per gallon*)
| Futures prices | Change from last | ||
|---|---|---|---|
| 05/15/20 | Week | Year | |
| Crude oil | 29.43 | 4.69 | -33.33 |
| Gasoline | 0.970 | 0.018 | -1.077 |
| Heating oil | 0.920 | 0.021 | -1.176 |
| *Note: Crude oil price in dollars per barrel. | |||
Stocks (million barrels)
| Stocks | Change from last | ||
|---|---|---|---|
| 05/15/20 | Week | Year | |
| Crude oil | 526.5 | -5.0 | 49.7 |
| Gasoline | 255.7 | 2.8 | 27.0 |
| Distillate | 158.8 | 3.8 | 32.4 |
| Propane | 62.697 | 1.071 | 2.384 |