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Take my Oil, Please: The US Crude Blend That Can't Be Given Away

© Fotolia / marrakeshhSome North Dakotan oil producers may go out of business as the new investment environment suggests they will have to pay to have some of their output shipped away.
Some North Dakotan oil producers may go out of business as the new investment environment suggests they will have to pay to have some of their output shipped away. - Sputnik International
The price of one low-quality blend of crude oil in North Dakota has dropped below zero, meaning producers would have to pay for their output to be taken away, three months after a similar precedent was set in Canada; the oil industry might be hoping for a pickup in energy consumption soon in North America to compensate for their current losses.

Kristian Rouz — As global oil prices touched their 2003 low at just above $28/bbl on Monday, North American investors turned their eye to oilfields in the North Dakotan/Canadian border region, which are effectively giving away difficult-to-refine oil. Amidst the overwhelming capital influx, the actual price bets of North Dakotan low-quality oil dropped below zero, while the ongoing devaluation of the Canadian dollar attracted massive investment in oil sands there, an indication of oil prices taking off eventually and investors buying promising opportunities to capitalize on them in the future.

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The price of North Dakota Sour oil, a high-sulfur lower-end blend, turned negative when the refining firm Flint Hills LLC, owned by billionaire investor brothers Charles and David Koch, offered —$0.50/bbl on Friday. The dramatic decline in price on that particular blend is explained in part by the insufficient infrastructure development, which demands large capital investment, as there are hardly any pipelines in the region able to carry the low-quality oil. In early 2015, North Dakota Sour was worth $13.50/bbl, and it was selling for $47.60/bbl in early 2014.

Since mid-2014, US oil prices have plummeted 70%, and currently the WTI February futures are being traded at $28.36/bbl in New York, their lowest since autumn 2003. WTI is one of the most expensive premium US blends of oil, while lower-grade blends are trading cheaper. As of January 15, Permian Sweet blend traded at around $19/bbl, North Dakota Light Sweet was selling for $18/bbl, Eagle Ford Condensate of Texas traded at $13/bbl, and now North Dakota Sour is —$0.5/bbl.

Some North Dakotan oil producers may go out of business as the new investment environment suggests they will have to pay to have some of their output shipped away. Meanwhile, the negative price offered by Flint Hills is expected to set a reference benchmark for other oil traders. Eventually, the entire oil industry might face the fact that an increasingly large share of their output is worth nothing or even less than that.

Other low-grade US oil blends remain in positive territory though, with South Texas Sour selling at $13.25/bbl and Oklahoma Sour at $13.50/bbl, only because the two aforementioned states boast a more developed pipeline infrastructure.

In the short-term, however, the impact of the negative oil price precedent will be quite negligible, as North Dakota Sour extraction represents a relatively small share of total oil production in that state, at about 15,000 bpd, while ND's largest oilfield, Bakken, is producing a massive 1.1 mln bpd.

Meanwhile, across the border, in Canada, the benchmark bitumen price dropped to $8.35/bbl compared to $80/bbl in 2014. Negative prices on select blends of oil first arrived in Canada roughly three months ago, with refineries running oil storage facility space paying people to take away low-end oil products at their expense. Nonetheless, select Canadian oilfields are still a major attraction to investors.

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On Monday, the Canadian energy enterprise Suncor Energy Inc. stroke a deal, buying out Canadian Oil Sands Ltd. in a $4.55 bln deal (C$6.6 bln), becoming one of Canada's largest oil producers with a stake of 36.7% in the province of Alberta, Canada's largest oil-rich region.

That said, the energy market in North America is readjusting to the ultra-low price environment, hoping for some of the earnings wiped out by the price drop to be made up for by rising domestic demand eventually. At the moment, however, the market is experiencing a painful redistribution of capital investment and projects reassessment, while the international factors destabilizing oil price outlook remain a major risk. 

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