Crude Oil Pricing & Formulas

What caused crude oil to briefly trade negative in 2020?

Double Black Swan: oversupply from Saudi-Russia conflict and demand destruction from COVID-19. Storage maxed out; traders paid to offload contracts.

What is the difference between WTI and Brent in terms of location, delivery, and pricing relevance?

WTI (West Texas Intermediate) is a light, sweet crude priced and physically delivered at Cushing, Oklahoma. It is the benchmark for domestic US crude oil pricing (NYMEX CL). Brent is a light, sweet crude benchmark priced in the North Sea and used as the international crude oil pricing standard. WTI is physically settled, while Brent is financially settled.

Explain the components of the crude oil formula pricing structure used in the U.S.

Crude formula pricing = CMA + Roll + Basis. CMA is the Calendar Month Average of daily CL settlements during delivery month. Roll represents forward curve differentials averaged over a trade month (typically the 26th of two months prior through the 25th of the prior month). Basis is the contractually agreed differential based on grade and location.

Define CMA and describe how it is calculated.

CMA (Calendar Month Average) is the average of daily NYMEX CL futures settlements during the month of delivery. It is used to price physical crude deliveries in formula-based contracts.

How is MEH used in crude pricing and what time frame determines its value?

MEH (Magellan East Houston) is a Gulf Coast delivery location used for pricing. The MEH differential is determined from the first business day after the 25th of two months prior to delivery through the 25th of the month before delivery. It reflects localized supply-demand and pipeline dynamics.

Describe the refining process from crude oil to end products.

Crude oil is sent to a refinery where it is separated by boiling points in distillation towers. Additional processes like catalytic cracking, alkylation, and reforming convert crude fractions into gasoline, diesel, jet fuel, and other products.

How do Gulf Coast refiners source crude supply?

Via pipelines (e.g., from Canada), domestic production (e.g., Permian), and imports. Gulf refiners often use formula pricing tied to WTI, MEH, and LLS benchmarks.

What is LLS and why is it used in pricing?

LLS (Louisiana Light Sweet) is a Gulf Coast pricing benchmark. Used in physical crude contracts due to proximity to refineries and pipeline infrastructure.

What is the refining yield of a typical 42-gallon barrel of crude oil?

A 42-gallon barrel yields about 44 gallons of petroleum products due to processing gains. Yields include gasoline, diesel, jet fuel, etc.

Explain the significance of the NYMEX crude closing range (1:28–1:30 PM CT).

It's the official window for TAS transactions. Trades executed here influence daily settlement pricing, critical for CMA contracts.

What role do publications like Argus and Platts play in the crude oil market?

They provide benchmark prices based on reported trades. Used for pricing physical contracts and assessing market transparency.

What caused crude oil to trade negative in April 2020?

Lack of storage due to COVID-19 demand collapse + oversupply from Saudi-Russia price war. Traders unable to take delivery sold at negative prices to exit positions.

Why is power trading more complex than gas or crude?

Electricity cannot be stored easily, demand fluctuates hourly, and markets are heavily regionalized with regulatory constraints.