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Vol. 16, No. 13 Week of March 27, 2011
Providing coverage of Alaska and northern Canada's oil and gas industry

What’s with big spread?

Alaska North Slope crude price soars above benchmark West Texas Intermediate

Wesley Loy

For Petroleum News

Recently the price of Alaska North Slope crude oil has topped $117 per barrel — a remarkable development.

We’re also seeing another unusual trend. The price of ANS crude is running far above that of West Texas Intermediate, a high-quality crude that serves as the major benchmark for U.S. oil pricing.

On March 23, the price of ANS stood at $117.55, a $12.35 premium over WTI at $105.20, according to figures available on the Alaska Department of Revenue’s Tax Division website.

Normally, ANS and WTI prices are much closer together, with WTI often commanding a small premium. The last time this happened was on Dec. 23, when WTI held a $1.35 edge.

‘Shallow’ ANS market

So what accounts for the huge gap we’ve been seeing lately?

It has much more to do with stresses on WTI crude as a benchmark than it does with any changes in the market for ANS crude.

North Slope oil is delivered aboard tankers almost exclusively to West Coast refineries. It competes on the spot market with other crudes that can be hauled in by water from places such as South America, Mexico and Russia.

But the market for ANS crude is very shallow. That is, transactions are infrequent. In fact, most days go by without a spot market deal for ANS crude, said Joyce Lofgren, a petroleum economist with the Department of Revenue.

Of the three major ANS producers, ConocoPhillips is the most apt to sell oil, typically to Tesoro, Lofgren said. Tesoro has refineries at Anacortes, Wash., and in California at Los Angeles and Martinez.

Sales are rare involving the other two North Slope producers, BP and ExxonMobil.

Normally, the light, sweet WTI crude is worth a couple of dollars per barrel more than ANS, which is a little heavier and more sour — that is, it contains more sulfur, Lofgren said. Thus, ANS requires more refining.

Brent also well above WTI

In comparison with ANS crude, WTI is a landlocked crude — it doesn’t move on tankers.

WTI crude goes by pipeline to the key oil storage and pricing hub at Cushing, Okla., and then to Midwest refineries making gasoline and other products.

Circumstances surrounding the movement of oil through the country’s midsection appear to have held down the price of WTI compared to U.S. coastal grades as well as North Sea Brent crude, the European benchmark.

Historically, WTI usually traded at a premium to Brent, again due to WTI’s relatively higher quality. But since December, the Brent price has exceeded WTI by as much as $19 per barrel, the U.S. Energy Information Administration reports.

The EIA as well as the financial and trade press have brimmed with analysis over what’s causing the unusually wide and persistent gap between WTI and other crudes.

Among the apparent factors:

• Cushing and Midwest refineries are oversupplied with crude, resulting in lower prices for WTI. One financial writer referred to the situation as the “WTI glut” or “Cushing glut.”

Rising crude imports coming down from Canada on existing and newly opened pipelines, plus the production surge from North Dakota’s Bakken shale, are contributing to the oversupply, the EIA and others write.

A lack of pipelines to carry oil south from Cushing to the Gulf of Mexico coast, rather than north into the Midwest, is seen as part of the problem.

• The market has worried that storage capacity is running out at Cushing, adding pressure to get rid of oil.

• Some see a “political premium” driving up some crudes such as Brent relative to WTI. This is a reference to the unrest in Egypt and neighboring countries.

Other factors driving up Brent prices include North Sea production outages and strong Asian demand for oil. So while WTI prices have remained relatively flat, Brent and other crudes including U.S. coastal grades have climbed, the EIA said.

So how long will the big gap between WTI, ANS, Brent and other crudes last? Everybody seems in agreement it will not become a new normal.

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