Light, sweet or heavy, sour? Oil industry needs new benchmark

The U.S. oil industry has changed dramatically in the past decade. Driven by technological advancements in drilling, crude oil production has reached new record highs and currently hovers at around the 9 million barrels-per-day (b/d) mark, up roughly 70 percent from 2007. 

But nearly three-quarters of oil production in the U.S. is light sweet crude oil or condensate. That is the kind of crude oil a majority of U.S. refiners typically do not consume. Rather, Gulf Coast refiners, whose combined capacity of 9.6 million b/d makes up more than half of the U.S. total, are still largely consumers of medium-to-heavy sour crude. 

{mosads}U.S. refineries process a wide range of crude oil grades, and some have been adjusting their crude slates in recent years to take advantage of the growing supply of light sweet crude in North America. 

Midwest and Gulf Coast refiners have invested in complex units designed to process medium-to-heavy sour crude oil efficiently. These refineries are optimally designed to run heavier crudes, and many continue to do so because any potential improvement in the value of the refined product slate from running light sweet crude can often be negated by the higher cost of light crudes compared with heavy crudes.

With so much heavy-to-medium sour crude consumed on the U.S. Gulf Coast, this presents a problem for those wishing to find a pricing benchmark in the region. The current U.S. crude benchmark is the CME-NYMEX light, sweet crude futures contract, which is delivered in the Midwest, at Cushing, Oklahoma.

Several crudes can be delivered into the contract, so the supply is not limited to one or two producers. This is necessary in establishing a pricing benchmark against which other crudes can be traded. But the contract, while very liquid, is the wrong grade and location for USGC refiners.

The current dominant global sour crude benchmark — Dubai/Oman crude — reflects crude traded in the Middle East and widely bought by Asian refiners. Plenty of medium-sour crude is produced off the U.S. Gulf Coast. Why not choose one of those?

Mars crude, for instance, is often used as an indication of sour crude pricing in the region. But Mars crude is owned by just two companies — BP and Shell. S&P Global Platts is proposing a better solution by producing a new daily price assessment for LOOP Sour, a medium-sour blend of several grades, domestic and imported.

The Platts LOOP Sour crude oil price assessment is named after the Louisiana Offshore Oil Port, an oil terminal located offshore and onshore in and around Port Fourchon and Galliano, Louisiana. Through a network of crude oil pipelines, LOOP has access to more than 2.5 million b/d of refining capacity in Louisiana.

LOOP Sour is a fungible blend of two domestic U.S. crude streams and three Middle-Eastern crude import grades delivered into one of the eight underground caverns at the LOOP facility. 

The two domestic crudes in the LOOP Sour blend are Mars and Poseidon, both produced in the Gulf of Mexico. The three Middle-Eastern grades in the LOOP Sour blend are Saudi Arab Medium, Iraqi Basrah Light and Kuwait Export Crude. 

Of the 1.1 billion barrels of crude oil imported into the Gulf Coast in 2016, Arab Medium accounted for 130 million barrels (12 percent); Basrah Light accounted for 64 million barrels (6 percent) and Kuwait Export Crude accounted for 50 million barrels (5 percent), according to Platts Analytics, a forecasting and analytics unit of S&P Global Platts, and U.S. customs data.

A number of companies have equity ownership of the five grades that go into the LOOP Sour blend, ensuring that the price cannot be easily influenced by one or two producers.

The U.S. Gulf Coast is an ideal location for a new sour crude pricing benchmark. This does not mean that West Texas Intermediate will no longer be a benchmark or a useful hedging tool, but it does encompass different basis risks in terms of location and crude quality for companies trading sour crude on the Gulf Coast.

Being a blend of five crude streams, LOOP Sour is also able to respond better to changes/disruptions in production, crude quality and trading patterns. In addition, LOOP Sour not only encompasses the price of domestic sour crude barrels, but also imported sour crude barrels that continue to comprise a key portion of U.S. refining crude slates — allowing for a more robust pricing benchmark.

John-Laurent Tronche is the S&P Global Platts managing editor of Americas crude, and Deepa Vijiyasingam is the S&P Global Platts senior specialist in the price group.

The views expressed by contributors are their own and not the views of The Hill.