Oil price differentials: Caught between sands and pipelines

Production from the oil sands and the Bakken is simply growing too quickly for infrastructure to keep up One of oil's most important characteristics is its fungibility, which means that a barrel of refined oil from Texas is equivalent to one from Saudi Arabia or Nigeria or anywhere else in the world. The global oil machine is built upon this premise – tankers take oil wherever it is needed, and one country pays almost the same as the next for this valuable commodity. Well, that's true aside from two factors that can render this equivalency void. In fact, crude oil prices range a fair bit according to the quality of the crude and the challenge of moving it from wellhead to refinery. Those factors are currently wreaking havoc on oil prices in North America: a range of oil qualities and a raft of infrastructure issues are creating record price differentials. And with no solution in sight, we think those differentials are here to stay. Parameters of pricing The first factor in oil pricing is quality. The best kind of crude is light and sweet: "light" means its hydrocarbon molecules average on the small side within the oil range; and "sweet" means it does not contain much sulfur. Light, sweet crudes are the easiest to refine into petroleum products, which makes them more desirable than heavy, sour crudes. No two reservoirs produce identical oil, though reservoirs in the same region often produce similar crudes. For example, conventional oils from Texas are generally lighter and sweeter than the crudes that make up the European benchmark Brent blend; this is why West Texas Intermediate crude oil carried a premium over Brent crude for years. Similarly, Bonny Light oil from Nigeria is a bit heavier and sourer than Algeria's Saharan Blend and therefore receives a slight price discount. Continue reading this article here.