West Texas Sour: Teaching an old dog new tricks

Автор Argus

Podcast: Although historically popular with US midcontinent refiners, West Texas Sour (WTS) has had to change with the times and learn new tricks as both a supply gap filler and a blending component.

A podcast episode

With Enbridge’s Southern Access Extension pipeline providing the US midcontinent with synthetic Canadian crude, West Texas Sour (WTS) has shifted from being the primary sour crude of choice to back-up supply. While this initially sunk WTS’ price in relation to WTI Midland, WTS’ new role as a blending component to make West Texas Intermediate (WTI) from lighter Permian production has resuscitated WTS prices. As a part of our 6-part series examining the US Gulf coast crude export landscapeAmericas Crude Editor Gus Vasquez and Americas Crude Deputy Editor Amanda Smith discuss the evolution of WTS and its current role in US crude markets.

 


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Gus: Welcome to a podcast from Argus, a leading provider of energy and commodity price benchmarks. We track and discuss the prices that create our world. And this is one of a six-part series about the prices affected by the changing U.S. crude oil infrastructure. I'm Gus Vasquez, Editor of Americas Crude.

Amanda: And I'm Amanda Smith, Deputy Editor of Americas Crude.

Gus: So today we're going to be be talking about WTS and how this market has seen some fairly big changes over recent years, and we'll kind of take you through a timeline of all these things as we go along. But to get started, maybe Amanda, you can give us a little bit of the background and we'll go from there.

Amanda: Sure. So WTS stands for West Texas Sour, and West Texas Sour is produced in West Texas and also in New Mexico, so, just like WTI (West Texas Intermediate), it is going to be the slightly heavier and more sour crude that's gathered up out there. And it's traded in the spot market in Midland, Texas.

Now, WTS is not a new grade. It's been around for a long time. Argus actually started assessing both WTS and WTI Midland in 1991 and it was already in existence prior to that. So, now its quality, like I said, is a little bit heavier. It's going to be roughly 33 to 34 degrees API, and the sulphur will say, ballpark like 1.5%. Now, WTI Midland, it's a higher, at roughly 42, 43, 44 API gravity. The sulphur can be higher than we're seeing but we know from the shipments down to Magellan in East Houston, those are coming down at under point 0.2pc typically.

Gus: All right, so now we have that background, let's start with the timeline. And we're going to pick a period that's kind of important. So we're going to talk about what was happening before the start of 2016. At that time, what you normally saw was WTS being run regionally, so local refineries, and then typically moving up to the midcontinent via the 250,000 b/d pipeline from Cushing, Oklahoma. And then from there, you could also reach the Chicago area and it would also go to Kentucky where Marathon Petroleum has a 240,000 b/d refinery at Catlettsburg.

The reason we picked this time period is because WTS, even though it's a lower quality crude than WTI, had been at a premium to WTI at Midland for 17 consecutive trade months. And there's a few reasons for that, so one of the main reasons is that there was marginal refinery demand for WTS that was helping boost its price.

At the same time, you had in Midland a really well supplied light market that was essentially bottlenecked because we didn't have enough infrastructure to get all the new production out quickly enough. And so that was weighing on the WTI Midland price, which means that obviously as Midland moves down, WTI Midland moves down, WTS Midland is being pushed up, the price gap between them starts to flip, and then we see a WTS premium. But after that we see things start to change again.

Amanda: Yes, so January 2016. In January 2016, we saw the start of Enbridge’s then 300,000 b/d Southern Access Extension pipeline, and this took Canadian crude down to the midcontinent refineries. So, especially Canadian synthetic crude provided an alternative to WTS for midcontinent refineries. Now this line has actually been expanded. It's at 900,000 b/d now. It's being expanded to 1.2 million b/d this year.

So then after that happened, we saw the WTS price differential to WTI Midland move to a discount on a trade month average basis for 30 consecutive months between February 2016 and July 2018 trade months now and then for most months for over three years. Now, that wasn't always a deep discount. Sometimes it was close to parity, but it was a discount for over three years until this past March trade month.

Gus: So now we move forward in time, and what we see with WTS currently is that it's really more of a regional crude. Its price is impacted by refinery outages in West Texas, maybe a little bit more these days. The pipeline issues around that area are also affecting its price more. So it's a different dynamic, right?

Amanda: Yeah. It's interesting because we see some flipping around when there's a Canadian supply issue, for example. So, if there's an issue that's keeping less Canadian crude from coming in to the midcontinent, and then you're going to see WTS pop back up again, because of it needing to go north to fill in that Canadian gap in the midcontinent.

Gus: And we have examples of that happening. So there was the Canadian wildfires in the summer of 2016, which probably a lot of our listeners remember. Then we had that upgrade or outage. So the Canadian synthetic upgrader, there had been some outages that started in March of 2017 and those just seem to keep going for a while.

And at that time, WTS then went up to near parity to WTI Midland again, so that kind of discount that we had been seeing starts to disappear a little bit. Also, what we have to remember is there's still the possibility to send WTS to the Gulf coast, provided that the price is high enough to incentivize people to do that.

Amanda: Right. And so these demand polls that might be the whole story for two, outside of the regional demands, if production was remaining constant. But we know that Permian production is booming. And so that was that mark that production, the marginal production coming out there is lighter sweet coming out of the Delaware Basin. And so WTS' role has evolved into being even more important for blending at Midland.

Earlier I mentioned about how WTS quality and WTI quality – where those fall – but as you may remember from our earlier podcast, there's a new grade that reflects the emerging production. So West Texas Light (WTL), which is roughly 45 to 50 degrees API falling in that range, you can see that WTI is in between WTS and WTL spec, so that makes for some great blending opportunities when it's economically feasible.

And for some time, pipelines also were not as strict on segregating out the West Texas light from the WTI. So there was even more WTL type crude or the lighter materials getting pushed into WTI. So as more light sweet crude production has come online, WTS is even more in demand for use and blending or what has been even more in demand for blending.

Gus: And that's because there's obviously an incentive. There's an economic incentive there to blend to WTI specs, and the prices show this because we saw WTL trading at as much as $2 under WTI when Argus first launched its WTL price at Midland on the 10th of April this year. So obviously at that time, you really have a $2 incentive to blend to WTI specs.

However, as time has gone on that gap has narrowed a little bit. So now we saw it fall to about $1.25 for July and August trade month. But interestingly, at the end of the August trade month, that was actually inside of $1. So the incentive to blend now is kind of going away a little bit. If we look at what was happening early last year, at that time the Permian Basin production was rising, and it was coming right up against limited pipeline capacity.

WTS differential to WTI Midland vs Permian basin production

That really meant there was nowhere for the barrels to go if we just kept going because at that time, there were projects to expand and create new lines, but those projects were not on yet. So the WTI price of Midland obviously starts to fall as it comes under pressure from this sort of oversupply and bottleneck that we have. And at the same time, WTS was actually trading at a widening discount to WTI at Midland.

But as the year progresses, what happens is that the WTS price starts to firm relative to WTI in Midland, because when pipeline capacity does come on, that creates an opportunity to blend again because now you have room to do that in your infrastructure. And you can turn that light material into WTI.

Amanda: Right, but as pipelines become stricter with proper batching as we come up against a blend wall, we're seeing that WTS value through fall against WTI Midland from where it had been. Maybe you can explain the blend wall to our listeners.

Gus: So the blend wall is a situation in which you basically have either too much light crude or the API of the crude is so high in this new production that you can no longer blend that away, so you can't meet WTI specs with the available WTS. So then you're essentially forced to start segregating the lighter material away because you can't just blend out of that situation.

So when you hit that blend wall, what we see is that WTL starts to emerge as a new grade that's kind of a standalone grade. It's now being sold separately from WTI. And we saw that start to happen a couple of years ago, but the spot market for WTL doesn't really take off till, well, essentially when we launch the Argus assessment for that price back in April of this year. Now if you want to learn more about WTL, there is a podcast that is part of this series that it goes into a lot of detail of the story of WTL and I would highly recommend that if you're curious that you go and check that out.

Amanda: All right Gus, thank you for that plug. And I really do hope everyone checks it out. But back to summarize our WTS podcast, with production hitting up against the blend wall alongside the stricter pipeline enforcement as segregated streams, the price incentive to sell the WTS into the spot market has been reduced from those higher levels.

So the August trade month ended with WTS right at flat to WTI in Midland on average from $0.25 or $0.50 in the few months prior to that. But it was still fairly volatile on a daily basis even in the August trade month. So it fluctuated between $0.25 under WTI Midland and $0.75 over WTI Midland.

So when there's less of a price incentive to use that WTS for blending, we think that more of the WTS supply that's bought on contracts is being run by the refineries that bought it instead of reselling it in the spot market. And then we're also hearing that refineries are trying WTL and liking it. So what we think is also happening is that more of the WTL is getting sold on contracts using our Argus price.

So we aren't seeing that necessarily in the spot market but that the refineries are essentially buying WTL, buying WTS, and blending up their own WTI at the refinery. So as you can see multiple factors can make WTS volatile to the other grades in Midland WTI and WTL. And so it's really I think gonna be interesting to watch the market going forward as these large capacity lines that we know are coming online soon start-up and then see what happens to the relative spreads between the grades.

Gus: So clearly a lot of complexities in this market. It's one to watch and we will keep watching it. But in the meantime, we've run out of time for this podcast. So thank you, Amanda, for all that. I think that was really helpful. And if you enjoyed this podcast, please be sure to tune in for the other five parts of the series. If you want any further information about US crude markets, WTS, whether that's daily prices or anything else, you can check out Argus Crude and Argus Americas Crude.

Amanda: Yes, and please also remember the dates have been set for the next Argus Americas Crude Summit which will be in Houston next year, February 3rd through the 5th. So check out argusmedia.com for more details. Thank you for listening, and we'll be back next time with another look into one of the prices that create our world.

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