Source: US Energy Information Administration, based on data from Bloomberg LP
Note: All prices except West Texas Intermediate (Cushing) are spot prices.
The New York Mercantile Exchange (NYMEX) first-month futures contract for West Texas Intermediate (WTI), North America’s most widely used crude oil price benchmark, experienced its largest decline and fastest in history on April 20, 2020, dropping as low as – $ 40.32 per barrel (b) during intraday trading before the close at – $ 37.63 / b. Prices have since recovered, and although the market event was short-lived, the incident is useful in highlighting the interdependence of the North American crude oil market as a whole.
Changes in the price of NYMEX WTI can affect other price markers across North America due to physical links to the market such as pipelines – such as the price of WTI Midland – or because a specific price is based on a formula – like the price of Maya crude oil. This interconnection led other North American crude oil spot price markers to also fall below zero on April 20, including WTI Midland, Mars, West Texas Sour (WTS) and Bakken Clearbrook. However, the usefulness of NYMEX WTI to crude oil market participants as a benchmark price is limited by several factors.
Source: US Energy Information Administration
First, NYMEX WTI is geographically specific as it is physically repurchased (or settled) at storage facilities located in Cushing, Oklahoma, and therefore is influenced by events that may not reflect the larger market. The drop in WTI prices on April 20 was in part due to a local shortfall in uncommitted crude oil storage capacity at Cushing. Likewise, as the price of the Guernsey Bakken fell to – $ 38.63 / bbl, the price of Louisiana Light Sweet – a chemically comparable crude oil – fell to $ 13.37 / bbl.
Second, NYMEX WTI is chemically specific, which means that in order to be classified as WTI by NYMEX, a crude oil must be within acceptable ranges for 12 different physical characteristics such as density, sulfur content, acidity, and purity. NYMEX WTI may therefore not be suitable as a price for crudes with characteristics outside of these specific ranges.
Finally, NYMEX WTI is time specific. As a futures contract, the price of a NYMEX WTI contract is the price to deliver 1000 barrels of crude oil in a specific month in the future (usually at least 10 days). The last trading day for the May 2020 contract, for example, was April 21, with physical delivery between May 1 and May 31. Some market participants, however, may prefer more immediate delivery than a NYMEX WTI futures contract. Therefore, these market players will instead look to shorter term spot price alternatives.
Taken together, these attributes help explain the variety of prices used in the North American crude oil market. These markers assess most of the crude oils commonly used by US buyers and cover a large geographic area.
Main contributor: Jesse barnett