In Flux: Crude Differentials - Oil & Gas Investor

May 5, 2014

"While the U.S. tight oil revolution has introduced a new set of locational pricing dynamics for crude, producers should be more concerned about the potential for absolute price changes.


Prior to 2011, West Texas Intermediate, Brent and Louisiana Light Sweet crudes traded closely together. Producers would generally get the same price whether they delivered crude to Cushing, the Gulf or the East and West coasts.


As U.S. production has ramped up during the past few years, however, these relationships have changed (see Figure 1). Basis risk now abounds in crude markets. Understanding the fundamentals behind crude basis and having an appropriately designed hedging strategy are priorities for U.S. producers. This article examines changing crude flows to identify the drivers of basis risk; just as importantly, it highlights the growing risk that U.S. crude prices could move significantly lower."


The entire article is available on the Resources page

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