Oil Prices and Value
The Value of a Barrel
The value of a barrel of crude oil is derived from the value of the end products after the barrel has been run through a refinery. End products include motor gasoline, diesel fuel, heating oil and a variety of other products. Due to regional differences in geology, all barrels of crude oil are not created equal. Oil produced from one region may provide more, or less, of these end products when compared to oil produced from another region. This will contribute to some price differences. As well, crude oil can be discounted for quality characteristics, including viscosity, sulfur content, heavy ends and other components.
The Price of a Barrel
In many cases, the price of a barrel of crude oil will differ from the value of its end products. Day to day changes in crude oil prices are determined by supply-demand balances in the marketplace. When discussing the price of crude oil, in the context of Alberta, some important oils to consider include:
- West Texas Intermediate (WTI): is a light (low viscosity), sweet (low sulfur) oil produced in the United States that yields valuable end products and is relatively easy to refine. It will naturally receive a higher price in the market place due to these more valuable characteristics.
- Brent : is a light (low viscosity), sweet (low sulfur) oil produced in the North Sea off the west coast of Europe. It yields valuable end products and is relatively easy to refine. It will naturally receive a higher price in the market place due to these more valuable characteristics.
- Western Canadian Select (WCS): is a heavy (high viscosity), sour (high sulfur) oil produced from Bitumen in Alberta. It yields fewer valuable end products, and is more difficult to refine. It will naturally receive a lower price in the market place due to these less valuable characteristics.
Producers and refiners will trade crude oil through bi-lateral agreements, brokers and on commodity exchanges such as the New York Mercantile Exchange (NYMEX), in New York. The NYMEX WTI contract is for delivery of WTI from a producer to a refiner, and is one of the largest traded crude oil contracts in the world. This contract represents the delivery of one thousand barrels of WTI to Cushing, Oklahoma from which a refiner will arrange for additional transportation to their facility for processing.
Transportation and market access play an important role in the supply-demand balance, and the resulting price of crude oil. This is especially true for oil produced in Alberta that will typically travel from the place of supply, the field, to the place of demand, the refinery, via pipeline. As an example of this, Canadian crudes are sometimes discounted because, at times, the supply in Alberta exceeds the provinces consumption and capacity to export to refining centres outside of Alberta via pipeline. As a result, buyers and sellers of crude oil may choose to transport oil by more expensive methods such as the railroad. A refinery will recover these additional transportation costs by reducing the price that it pays a producer for a barrel of its oil.
WTI is considered the benchmark price of oil in North America, and its price changes will better reflect the supply and demand balance and transportation constraints for light, sweet oil in North America. Brent is considered as one of the benchmark prices for oil on a global scale, and its price changes will better reflect the supply and demand balance for light, sweet oil on a global scale. Brent is traded on both the Intercontinental Exchange (ICE) and the NYMEX. Western Canada Select (WCS) is considered as one of the benchmark prices for heavy oil produced in North America, and its price changes will better reflect supply and demand balances for heavy crude oil in North America.