Heavy is the Crude that Wears the Crown
Denser, more sulfurous crudes are experiencing a pricing renaissance amid a shrinking of the typical discount to lighter crudes like Brent and WTI.
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Headline crude prices may be on an uninspiring run, but oil isn’t one homogenous thing—and the price of Western Canadian Select (WCS), as just one example, is actually up a whopping $15/bbl (>20%) year-to-date.
Understanding what’s driving relative value between various crude grades reveals important end-market drivers (like marine bunker fuels) and supply trends that headline light sweet benchmarks alone obscure.
The improved fortunes of crude grades that typically trade at wider discount to WTI and Brent speaks to the broader-based strength the oil market is experiencing below the surface, which is a much healthier producer environment than even we experienced when headline prices were higher last Fall.
The price of oil is flat to down on the year; but, this single number—by which we typically mean the price of a barrel of WTI or Brent crude—obscures the tremendous diversity in relative value across the universe of crude grades. Indeed, while the most commonly referenced light sweet crudes are on an uninspiring price run, heavier crudes are actually having a pretty great year. As just one example, the price of Western Canadian Select (WCS), a heavy sour crude that represents Canada's main crude export blend, is up a whopping $15/bbl (~20%) year-to-date.
So, why are heavier crudes outperforming and what does this say about the broader oil market? Light sweet crude will, of course, continue to dominate the majority of global crude price formation and serve as the reference backbone against which virtually all other crudes are priced. But, light sweet crude also only makes up a narrow portion of the overall market; in fact, light sweet crudes make up less than one-fifth of seaborne traded crude. In other words, the performance of medium and heavy grades has a material impact on the earnings of producing companies and nations. Understanding what’s driving relative value between various crude grades reveals important end-market drivers (like marine bunker fuels) and supply trends that headline light sweet benchmarks alone obscure.