That depends on where the oil is. Currently, Brent crude is trading at approximately $80/bbl. U.S. benchmark crude futures, priced at Cushing, OK, are trading about $10/bbl. below Brent, and cash prices in the prolific Permian Basin are even lower. However, the “prize?” goes to Canada, where Western Canada Select crude cash prices are currently below $40/bbl.
Part of the pricing discrepancy is attributable to relatively short-term, local supply/demand issues. A bigger factor is transportation costs. Moving oil by sea, say from the Persian Gulf to refineries on the U.S. east coast, costs approximately $2/bbl. By contrast, pipeline cost across the continent average about $5/bbl. while rail transportation across the U.S. costs about $19/bbl.
Currently the problem of moving oil from the wellhead to refineries, and then to users, is being further complicated by shortages of pipeline capacity and rail cars.
Investors might want to consider that, despite a major storm in the Gulf of Mexico and government pressure on Iranian sales, there is plenty of oil, but not always in the right places.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA