Newspaper headlines.  News reports.  Blogs.  Emails.  Newsletters.  It seems that everywhere one turns, people are reporting on or discussing the price of oil (and to a somewhat lesser extent the price of natural gas).  The price of oil has, itself, almost become a sport.  Grab the morning paper, check the baseball standings and then turn to see the price of oil.

Despite all of this attention, many people do not understand what is meant when “the price of oil” is reported.  In fact, there are two widely reported “benchmark” oil and gas prices (and a few others that are less commonly used).  These benchmark prices differ from one another, sometimes substantially, so it is important to know which benchmark is being referenced at any given time.  Moreover, there frequently are significant differences between a benchmark price and the price an operator in the field actually receives.  To truly understand the economics of oil and gas operations, and the impact of low prices on those operators, it is critical to understand these differences.

West Texas Intermediate (WTI):  WTI refers to oil extracted from wells in the United States  and delivered – generally by pipeline – to Cushing, Oklahoma, a major oil trading hub.

Cushing has been the delivery point for crude contracts and the settlement point for West Texas Intermediate on the New York Mercantile Exchange for the last three decades.

WTI is also commonly referred to as Texas light sweet – light because it has a relatively low density (API gravity of around 39.6 and a specific gravity of about 0.827) and sweet because of its low sulphur content (only about 0.24%).

Brent Crude or Brent Blend (Brent):  Brent is another classification of sweet light crude, and references oil produced in the North Sea.  The general term “Brent” actually refers to oil from four different fields in the North Sea: Brent, Forties, Oseberg and Ekofisk.

Brent crude is classified as a light crude, though not as light as WTI.  As with WTI, Brent crude is sweet crude, containing approximately 0.37% sulphur.

Brent is the primary benchmark price for oil purchases worldwide and is the reference point for nearly 2/3 of all crude contracts.

Historically, WTI and Brent traded closely with one another, but beginning in about 2007, various factors, including the value of the U.S. dollar, supplies at Cushing and other storage locations, and global politics, have resulted in varying disparities between Brent and WTI prices.  In recent months, WTI has continued to trade lower than Brent, with a spread varying between around $4 a barrel to as high as $15 per barrel.

Price Differentials:  WTI and Brent are “benchmark” prices.  The price an individual operator may get in any given field may be more or less than either benchmark.  Generally, when someone refers to a price “differential,” reference is being made to the difference between a market price, such as the NYMEX WTI price, and the price actually received when the produced oil is sold, commonly known as the “wellhead price”.

Price differentials can be based on a number of factors including location, transportation, storage and quality.  The latter – quality – is a common price differentiator.  Sweet crude with low sulphur content is generally priced higher than sour oil that contains more sulphur.  In addition, more and more, regional market dynamics – principally, transportation and storage costs – are greater factors in regional price variations.

An excellent example of price differential in the U.S. crude markets is found in the Bakken Field in North Dakota, an area that often has a wellhead price of $10-$12 less per barrel than WTI.  A recent online edition of the Rocky Mountain Oil Journal listed the price of oil at 13 locations or pricing points, in addition to WTI.  Each of these prices was lower than WTI, ranging from a high price at the Four Corners, making it only $0.80 less than WTI, to a low price for Wyoming General Sour that was almost $20 per barrel less than WTI.
Source: Fox Rothchild