Two core indicators measure the quality of crude oil. One is API specific gravity, which measures the relationship between the density of oil and the density of pure water. The higher the specific gravity, the lighter the oil. Conversely, when the specific gravity is low, the oil is considered heavy and low quality.
When the API specific gravity is between 10 and 22.3, it is considered a heavy oil, for example, crude oil from Dubai, Oman and Abu Dhabi. When the API specific gravity is between 22.3 and 31.1, it is a medium oil. The best crude oil is when the API specific gravity is above 31.1, Brent crude oil and US crude oil (New York crude oil) are both light oils, the former has an API gravity of 38, and the latter is 39.6. Therefore, US crude oil is of higher quality than Brent crude oil.
Another indicator is the sulfur content. Sulfur is a corrosive substance, and its high levels are not desired in energy products, such as coal and oil. According to international standards, oil with a sulfur content below 0.5% is the best oil, and it’s also referred to as sweet oil. When the sulfur content is higher than 0.5%, it is known as sour oil because its quality is low and has more impurities. The sulfur content of Brent crude oil is 0.37%, and the sulfur content of U.S. crude oil is 0.24%. Obviously, in terms of sulfur content, U.S. crude oil wins again.
Therefore, the comprehensive quality of U.S. crude oil is higher than that of Brent crude oil. However, the problem of crude oil quality is not the core reason Brent crude oil price is more expensive than U.S. crude oil. Instead, some claim that shipping issues have contributed to higher Brent prices.
The full name of Brent crude oil is North Sea Brent crude oil, which means that the crude oil is produced in the United Kingdom’s North Sea region. The full name of U.S. crude oil is West Texas light sweet crude oil. It is named West Texas because Texas is the core area where Canadian oil and the Gulf of Mexico oil are found. It is also close to U.S. crude oil inventories held in Koshineki, Oklahoma (mainly the Cushing area of Oklahoma state).
Compared to onshore oil, offshore oil has the advantage of lower transportation costs. Therefore, using this logic, the transportation price of Brent crude oil should be lower than that of U.S. crude oil, and the corresponding price of Brent crude oil should be lower than that of U.S. crude oil. However, this contradicts the current reality of higher Brent crude prices, so transportation issues are not the core reason for the price difference.
The core reason the price of U.S. crude oil is lower than that of Brent crude oil is that the maturity of U.S. shale oil development technology has led to a rapid influx of high-quality shale oil into the market, leading to a severe imbalance between supply and demand.
The API gravity and sulfur content of shale oil are higher than traditional U.S. crude oil. Still, refineries in Texas were initially unable to adapt to such high-grade oil, so shale oil was often compared to oil products from Canada and Mexico, which are mixed and then refined.
Some people may ask: Why did shale oil not impact the price of Brent crude oil, but only the price of US crude oil? The reason is that the US crude oil consumption area does not coincide with the Brent crude oil consumption area.
Crude oil is mainly transported via pipelines, mainly based on proximity, which influences the type of oil used in each country. Brent crude oil is supplied chiefly to the Nordic region, while US crude oil is primarily supplied to the United States and the Americas. Crude oil from the Middle East is mainly supplied to Asian countries, each with its territory.
If shale oil technology becomes more mature in the future and production levels rise to create excess oil, the U.S. may begin supplying oil to the rest of the world, overturning the current status quo, which has kept U.S. crude oil prices lower than Brent crude oil. After all, the factors determining the price of commodities should also be the quality of crude oil from an economic standpoint.
Although shale oil technology continues to mature, the cost of extraction is much higher than that of traditional oil extraction methods. When the crude oil market prices are low, many shale oil manufacturers tend to suspend production to avoid a situation known as “thanks for your hard work”. The mainstream view is that most shale oil producers can make profits when crude oil prices are above $50/barrel. When the price is below $30/barrel, most shale oil producers will choose to stop production.
The profitability of shale oil producers is another factor that forms an invisible suppressive effect on crude oil prices. Therefore, traders who trade crude oil futures should pay attention to the recovery of shale oil production to avoid buying crude oil when production has ramped up, leading to lower prices.
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