Slide 7 of 25
- As this figure shows, when crude prices have increased, the light-heavy crude price
differentials have expanded, and when crude prices declined, the differential contracted.
- Note the different scales: the price scale is 2 times the difference scale.
- To understand the price and differential relationship, consider what happens when crude
- First, from the heavy side, the lower crude price reduces the price of residual fuel,
making it more competitive with other boiler fuels, and the price of residual fuel
relative to crude oil increases. Thus, both the light-heavy product difference and the
light-heavy crude difference contract.
- Second, in the surplus market that brings downward pressure on crude oil prices, light
product markets often are in surplus, which weakens light product prices, reducing the
difference further from the light side. Usually the heavy side movement is more dominant.
- Because of other factors affecting these differentials, on a short-term basis, there is
not a perfect correlation between price and differential movement. For example, crude
prices started moving up early in 1994, but the differential continued its slide through
much of the year.
- Over the first few months of 1998, crude prices have continued to slide, but the
differential bumped up. It would appear this is a temporary situation, which will be
discussed later in more detail.