Many people do not realize that the oil Swan Energy pulls out of the ground in Oklahoma has different characteristics than the oil that comes from the Middle East or Canada. There are two factors that generally define the characteristics of oil that create these differences.
The first factor is called API gravity. API stands for American Petroleum Institute. This is a statics that is used to measure how heavy or light petroleum liquid is compared to water. If the API gravity is less then 10, it is heavier than water and sinks; if the API gravity is greater the 10 then its lighter than water and floats above water. API is measured in “degrees”. Most petroleum values fall between 10 and 70 API gravity degrees.
Generally oil with an API gravity between 40 and 45 commands the highest prices. Oil that has an API above 45 degrees is less valuable to refine because of the changes to the molecular structure.
The API gravity from the oil that Swan Energy (http://swanenergyinc.com) is currently pulling out of its wells in Oklahoma is about 38.00 to 42.00 degrees.
There are three main classifications of oil based on API Gravity:
- Light crude oil: API gravity greater then 31.1 degrees
- Medium crude oil: API gravity between 22.3 and 31.1
- Heavy crude oil: API gravity less then 22.3
- Extra heavy crude oil: API gravity below 10.00
There may be some differences in grading from party to party, but this will give you a good baseline to conceptualize the grades of oil.
The second factor is how sweet or sour oil may be. This is based on the sulfur content of the petroleum. Petroleum is considered “sweet” if it contains less then 0.5% sulfur. “Sour” oil refers to petroleum contains more then 0.5% sulfur.
The term “sweet” comes from the nineteenth century prospectors that would taste small amounts of the oil to determine its quality – the low level of sulfur provides the oil with a mildly sweet taste and pleasant smell.
Sour oil is much more widespread than sweet oil. Sour oil is found in Canada, the Gulf of Mexico, parts of South America as well as most of the Middle East. Sweet crude is more commonly produced in the Central United States, most of Africa, the Asia Pacific and the North Sea.
Sweet crude is preferred because it takes less processing in order to remove impurities. Light sweet crude has the highest demand while heavy sour crude is traded at a discount. The oil that Swan Energy is currently getting out of Oklahoma is considered Light Sweet Crude.
Using these two factors, oil is then priced on the world market using the different types of oil. There are two major benchmarks for world oil prices: WTI crude oil and Brent crude oil. While both are light sweet crude oils, historically WTI trades at a premium (by just a few dollars a barrel) because it is generally lighter and sweeter. Swan Energy sells the oil produced by the Joint Venture wells using the WTI index not the Brent index.
In 2010, for the first time, this changed and now WTI is trading below Brent by as much as 20%.
The variance between WTI and Brent began at the end of 2010 and was accentuated in February of 2011. There are two main factors contributing to this. First are the Libyan crisis and the Arab Spring, which decreased supply of light sweet crude to Europe. The second, which may be more long term then the Libyan crisis, is the oversupply at the main storage facility in Cushing, Oklahoma.
As the new pipelines from Canada came online along with oil production increases in North Dakota and Colorado combined with the two pipelines sending oil up from the Gulf resulted in the Midwest refiners being oversupplied with oil. What also may be a factor is the oil coming from these areas may not comparable in quality to the light sweet crude oil from the Midwest. These factors are all playing a part in creating a large delta between Brent and WTI.
There are some analysts that believe that market manipulation may be playing a factor as well. The bottom line is that we will have to wait and see what happens as the crisis in Libya settles down and as more and more oil coming form Canada and North Dakota is being transported by truck and train to the Gulf.
Ultimately, demand remains high and while we may see short term increase in supply, oil supply is still diminishing world wide and this will continue to keep oil prices high – as evident by the increasing WTI prices as it closes the gap between Brent and WTI at the end of October and beginning of November.