Seems maybe a silly question but what type of oil is being produced in Reeves County Is it West Texas Intermediate or some other type. I'm trying to correlate the price on my royalty checks with current listed closing price.
Bob McCormack
I believe it is WTI but the price on your check is based on the production month. So you won’t be able to tie to today’s WTI. There should be historical WTI prices by month on the Internet. Then you could compare price paid to the month your paid on your run check. But some companies do ‘hedging’ which I can’t explain well but that may affect the price you’re being paid.
Cami,
It's not a silly question at all. Much of the differential is due to calculation by volumes (barrels) rather than mass (metric tons).
WTI has an API gravity of 39.6 degrees which translates into a specific gravity of 0.827. At "standard temperature and pressure (60 degrees Fahrenheit, 1 atmosphere), WTI is only 8/10 as heavy as water. It contains 0.24% sulfur and is refined in the Midwest.
About half of the new Permian production has an API greater than 42 which means it is lighter (less dense) than the standard. Being less dense means that less energy (fewer carbon atoms) are in each barrel. That's why condensate (very light liquids associated with gas production) sells at a discount. Very heavy crude also sells at a discount since it is more difficult to transport and refine.
The price at the wellhead on which royalties are paid is also affected by the cost of the transportation to the refinery -- the differential value between wellhead price and price at the refinery gate.
The new pipelines coming into the region should improve wellhead prices due to more competition to fill pipelines and opening up new channels to competing refineries.
Thank you folks. Very informative, apparently oil is not always just oil.
A comment was made that some companies do 'hedging' that may effect the price you (royalty owners) are being paid. Somebody correct me if I'm wrong, but I think hedging may impact the operator's future earnings but wouldn't effect the crude price they pay their royalty owners.
A simple example might be a company that enters a hedging contract where they sell an amount of crude equal to all, or part, of what they expect to produce next year at say $50/barrel. If the actual price next year ends up being $40 then the company's earnings would be $10/barrel higher than without that hedge in place. Or if next year's actual crude price turns out to $60/barrel then the company's earnings would be lower than without the hedge but they, and their stockholders, have had the insurance benefit of locking in the minimum crude price they would receive next year.
In either case though the royalty payments the operator makes wouldn't be helped, or hurt, by how the hedge turned out since the royalties would be paid based on the actual price the operator sells production from a given well for each month, not the price they hedged at.
If the royalty owner wants to lock in their royalty income at a certain crude price they'd need to set up their own "hedge" by buying a crude futures contract.
Well put sir ! Exactly the basic reason the commodities futures markets exist. I've traded commodities in the past but of course as a speculator. The other two types of traders are market makers and those looking to hedge or lock in future prices. All three are needed for a market to work.
In my case the price per barrel over the last 6 checks has gone from appox $41 to $ 48 which is below current quoted market price but that of course is for the standard grade of West Texas Intermediate which M A Smith has pointed out is just an approximate. Also the sales on checks will be well before the current price as it takes a while for the accounting to catch up with the actual sale. But the trend is going up in the same curve as the daily listed prices so in this case the sales are not at a fixed (hedged) price. The producer is selling at market price rather than a fixed contract.
So I've seen prices from the mid $20's up to the high $40's. And you can bet I'm keeping my eyes on what is going on in the Middle East !
Hedging -- yes, it doesn't directly affect the wellhead price. The futures contract (hedge) can be "naked" since one can speculate without owning physical barrels (a very risky position). Please note that the royalty share of oil is not actually owned by the operator. A royalty owner could theoretically take his share of the oil "in kind", but that would likely lose, not create, value to the royalty owner since it is more efficient to transport and market the entire crude stream together.
On the other hand (I know I sound like a character from Fiddler on the Roof), the futures markets do have some impact on current spot prices. To that extent, hedging does have an indirect effect on wellhead pricing.
Well there are a couple of ways it can work. There is a length of time on every futures contract when it expires. If one has sold a contract and it expires the seller is obligated to actually deliver the product at the specified price. Of course speculators and hedger don't usually do that, they get out of the contract by either selling or buying depending what side of the transaction they entered on, seller or buyer. So it is possible that product could be priced according to a contract entered as a hedge.
It's not uncommon for those who actually use gold to lock a fixed price for future delivery and expect to actually take delivery of the gold itself. Though I doubt that happens in the oil market much.