Oil Price Confusion
Media commentary regarding the price of oil tends to focus on two widely quoted markets, Brent and West Texas Intermediate (WTI).
The price of Brent crude reflects North Sea sourcing, whereas WTI is used as a benchmark in oil pricing. WTI is the underlying commodity of the Chicago Mercantile Exchange’s oil futures contracts. There are other important oil markets, including Dubai Crude, Oman Crude, Urals oil and the OPEC Reference Basket. These markets do not always move together as a variety of factors, such as inventory, weather and refining capacity can temporarily affect regional demand and pricing.
The quoted prices represent the price at those distribution points. The price that is key to drilling and production decisions is the price at the wellhead, (the point at which the oil comes out of the ground). Wellhead pricing varies widely, for a number of reasons, of which the most important is usually transportation cost. Refineries buy oil based on the appropriate benchmark. The producer bears the cost of transportation.
Ocean transportation is by far the cheapest. Shipping costs from the Persian Gulf to Houston area refineries approximates $2 per barrel (bbl) while it costs less than $1 per bbl. to transport oil from Venezuela to the U. S. gulf coast. Pipeline transport typically approximates $5 per bbl. in the United States, about one-third the cost of rail shipments.
Paul Ausick, energy editor at 24/7 Wall Street, estimates that it costs approximately $11 per bbl. to ship oil by rail from the Williston Basin (located in the Montana area) to Houston, and about $19 per bbl. to East Coast refineries.
Based on a benchmark price of $50, Persian Gulf and South American producers are netting $48-$49 per bbl. while some producers in the Williston Basin may be netting closer to $30 per bbl.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA®