WTI vs. WTI vs. WTI

The degree to which the perception of quality of West Texas Intermediate crude oil influences price was on display Wednesday in the form of the following crude value indication given to S&P Global Platts: WTI Midland at Cushing, Oklahoma, is worth 90 cents/b more than WTI at Cushing.

If that sounds confusing, it is, and let me explain.

West Texas Intermediate is the flagship US grade of oil produced in the Permian Basins of West Texas and transported by pipe, rail and truck to refiners near and far (like India far). The value of WTI at Cushing, Oklahoma, is the most commonly accepted benchmark for crude sales in the Americas for varying types of crude oil produced onshore and offshore in the US. It's called "Cash WTI."

WTI at Cushing also forms the backbone of the de facto North American crude oil futures contract, CME Group's NYMEX WTI Light Sweet Crude Oil, which for simplicity's sake we'll call NYMEX Crude from now on. Launched in March 1983, historically, it was often colloquially referred to in the market as "NYMEX WTI," even though WTI was one of many grades that could be delivered at Cushing against the contract, which caused uncertainty.

"Confusion over what is sold has led to problems, Merc officials say," an Associated Press article from August 1990 reads. "Some buyers who thought they were getting WTI have discovered they were getting a different grade." That led the NYMEX at the time to tell the market it should refer to the contract as light sweet crude instead of WTI, though the three-letter acronym persists to this day.

CME says NYMEX Crude represents light sweet crude oil meeting a series of specifications including 37-42 API, less than 0.42% sulfur and other parameters, which includes WTI-type light sweet crude streams as well as other blends referred to as Domestic Sweet, or DSW, that meet those specs.

To simplify: NYMEX Crude is WTI that meets NYMEX parameters, as well as other crudes, which may be blends, that meet NYMEX parameters. Blended crudes aren't bad, but the possibility that a buyer may get one is an uncertainty, and uncertainty leads to lower bids for the unknown and higher bids for the known.

The difference between physical, NYMEX-spec WTI and the NYMEX contract is what's called the exchange-for-physical, or EFP, which on Wednesday was heard to have traded at 2 cents/b. Therefore, physical WTI that meets NYMEX specs is worth 2 cents/b more than plain-old NYMEX-suitable crude.

Returning to that first price indication for WTI Midland at Cushing. Someone appears willing to pay a 90 cent/b premium to NYMEX-suitable WTI for pure, unblended WTI direct from the Permian to Cushing. An absolute guarantee of quality is nearly a full dollar over what, in theory, should be the same grade, if you figure that all WTI is Midland WTI.

Refiner worries about the significant amount of blending that goes on at Cushing -- where crudes from all around North America comingle -- has led to a significant price difference between DSW (NYMEX crude that isn't WTI), NYMEX-suitable WTI, and virgin WTI from Midland.

That's confusing.

To ease the confusion, CME Group in mid-December said it would amend Chapter 200 -- essentially the rulebook for the NYMEX Crude -- by adding additional quality requirements for physical crude deliveries against the January 2019 contract month and beyond.

Its move followed an identical move announced one day earlier by Enterprise Products Partners, one of two midstream outfits to which pipeline access is a must for barrels to be included in NYMEX Crude delivery. (The second, Enbridge, does not appear to have expanded its definition of WTI.)

"CME Group is amending the contract specifications to include five additional quality test parameters which will provide assurance that the quality and integrity of West Texas Intermediate (WTI) is maintained," the exchange said at the time.

The changes have been applauded by refiners -- largely through their work via the Crude Oil Quality Association, which recommended the Enterprise- and CME-adopted changes -- but it remains to be seen whether this results in a narrower spread between "pure" WTI Midland at Cushing and WTI at Cushing that's suitable for NYMEX delivery. In other words, as a result of the changes, does the perception of WTI at Cushing -- or Domestic Sweet -- improve?

One notable point: Enterprise and CME kept the API ceiling at 42 degrees in their mid-December changes. (In their defense, the COQA does not appear to have suggested any changes to API or sulfur.)

Platts Analytics data suggests the majority of the oil coming out of the Permian Delaware and Permian Midland basins is skewed toward light-sweet. Three of four crude assays for non-Cushing WTI provided to Platts since November showed API gravity of more than 42 degrees -- 42.2, 43 and 43.4 -- that wouldn't be suitable for NYMEX delivery. That WTI isn't on-spec to be called WTI.

In its revised specs, CME Group ditched the uncommon grades -- Low Sweet Mix (Scurry Snyder) and New Mexican Sweet, among others -- but will continue to allow blending of domestic crudes so long as they meet the same specs deliverable WTI must meet.

In 2018 alone, my boss and I have spoken with buyers of US crude in Singapore, India, China, South Korea, Japan and Northwest Europe. The overwhelming consensus about US crude quality has been that it varies dramatically, and blends are bad. By and large, US exporters can forget about selling DSW abroad for the moment.

If we've learned anything in the more than two years since US crude export restrictions were lifted, it's that globally, refiners are well aware of the sophisticated blending operations in the US and are wary of anything that hints of a blend. That's why buyers are asking for "WTI Midland" instead of just "WTI" -- to be sure they're not getting WTI via Cushing.

But judging by the continuing price spreads between DSW, NYMEX WTI and unblended WTI Midland, all at Cushing, it appears US refiners are just as picky as those outside of the US.