US physical crude differentials resist financial price dive

Author Jeff Kralowetz, VP, Business Development

Nymex light sweet futures, the US crude oil benchmark, undertook an unprecedented dive into deeply negative prices on April 20 as trade for the May contract neared expiry.

The Nymex front-month price dropped from the high teens early in the morning eventually to settle at -$37.63 at 2:30pm Eastern Time.

But while the price collapse was widely interpreted as a signal that demand for crude had dried up as storage neared capacity, differentials for physical crude oil grades reported by Argus actually sprang higher to compensate for the dramatic move in the financial market.

Despite the downward price spike, there were no interruptions in trade, and the cash market adapted by pricing at differentials that reflected physical fundamentals. And key physical differentials remained in fairly stable relationships with one another.

Physical differentials to Cushing

Source: Argus Americas Crude

But because the Nymex dropped quickly towards the daily settlement, many of the outright prices for physical crudes were negative in the April 20 Argus Americas Crude report. Most Argus assessments in the US Gulf coast market are based on a volume-weighted average (VWA) of trades done at differentials to the Nymex light sweet crude contract throughout the day. The differentials are then applied to the Nymex price to derive the outright price of each grade.

In a snapshot of key grade differentials, WTI Houston rose from +$3.40 on April 17 to +$16.50 on April 20. Mars went from +$1.75 on April 17 to +$11.00 on April 20, and WTI Midland went from +$0.375 on April 17 to +$12.00 on April 20. Despite the dramatically higher differentials, all three physical grades for May delivery ended up with negative outright prices: WTI Houston at -$21.13, Mars at -$26.63 and WTI Midland at -$25.63.

The depth to which the May contract – which expires April 21 -- fell was also unusual because it opened up a record spread of $58.06/bl to the June Nymex contract, which settled on April 20 at +$20.43/bl.

In spite of erratic price moves for May crude, the fundamentals of US physical crude markets showed signs of rebalancing in the face of decimated domestic and international crude demand. Producers have begun announcing planned production cuts, midstream companies have warned they will not accept unsold barrels into their systems, and creative options for increasing storage capacity have emerged. Among these are the federal government’s offer to take 23mn bl from nine companies into the Strategic Petroleum Reserve domes in Texas and Louisiana. At least 25 VLCC tankers have been heard placed on subjects in the Gulf coast for floating storage. Rail cars and barges are also being considered for temporary crude storage.

About 57pc of onshore tank and cavern storage in the US was full at 503.6mn bl as of April 10, according to the US Energy Information Administration. In Cushing, storage was 69pc full at 55mn bl. US west coast storage was 65pc full, midcontinent storage was 60pc full, Rockies storage was at 60pc, east coast storage was 49pc full and Gulf coast storage was 55pc full.

Argus will continue to reflect markets as they trade in its daily price indices. Market participants are free to use these prices as they see fit in term contracts, internal transfer pricing and other applications.

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