Alex Mills
By Alex Mills
What in the world is going on with crude oil prices?
Historically, when war breaks out in the Middle East, where a major portion of oil exports come from, prices increase.
However, crude oil futures for November delivery on the NYMEX settled at $90.73 per barrel on Oct. 1, the lowest settlement since April 2013.
“The extended sell-off in global crude markets has reduced Brent futures market by around $16 per barrel since the start of the quarter (July 2014),” according to a report issued by J.P. Morgan. Brent closed at the lowest level since June 28, 2012. Prices decreased 16% last quarter and have slipped 15% this year.
Brent futures is crude oil traded in London, and it traded for $94.16 on Oct. 1. NYMEX is crude oil traded in New York.
Brent has been trading $10 to $15 higher than West Texas Intermediate (WTI) on NYMEX, but J.P. Morgan reports that “the spread between WTI and Brent futures appears to have become more stable over the past six month than seen in the previous eight quarters.”
The current spread is $3.43 between Brent and WTI.
While Brent and WTI are prices paid for future deliveries, the price reported at Cushing, Ok. is for actual barrels. Cushing is a major storage facility for crude oil, and the supply of oil at Cushing has an immediate impact on prices at Cushing and throughout Texas.
The enormous increase in oil production in the Permian Basin and all across Texas, and the lack of takeaway infrastructure is causing an oversupply of crude oil at the lease level. J.P. Morgan expects that supplies of domestic crude oil to increase 1 million barrels per day over the same period last year during the fourth quarter of 2014.
A major source of all of this new supply will come from the Permian Basin where prices have decline $17.50 per barrel below the price at Cushing, according to a news story in the Sept. 28 edition of the Midland Reporter-News.
The story quoted the EIA estimating oil production in the Permian Basin to have increased 300,000 barrels per day from a year ago to 1.7 million barrels per day.
The story quoted one producer who said he would net $80 per barrel in September.
In addition to the increase in oil production, most of the pipeline capacity currently available goes to Cushing, where there is an oversupply.
Additional 225,000 barrels per day capacity on the Longhorn Pipelines and expansion of Sunoco Logistics Partners’ Permian Express pipeline may be available soon to reduce the transportation issues.
The other major destination for Permian Basin crude is the Gulf coast of Texas and Louisiana, where there are many refineries with an estimated capacity of 9 million barrels per day. However, the oil produced in the Permian Basin is primarily a light, sweet crude similar to the oil being produced in the Eagle Ford Shale in South Texas. Most of the refiners on the Gulf Coast cannot handle all of the new sweet crude. They were built to handle a sour, heavier crude oil.
Some producers want to be able to export the sweet crude to other countries, but U.S. law prohibits the export of most crude oil.
More pressure on softening oil prices comes from Saudi Arabia’s announcement it has reduced its benchmark Arab Light prices to customers in Asia, Europe and the U.S. The Saudi price cut is a sign that they won’t be cutting back production further and may be setting up for a market share battle.
All of these factors have caused oil prices to decline even though there is a shooting war in progress in the Middle East.
Alex Mills is President of the Texas Alliance of Energy Producers. The opinions expressed are solely of the author.
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