Global crude market faces contrasting quality availability
In this insight we explore some of the factors driving unusually high premia of medium-heavy sour vs light-sweet crude.
Light crude oil with its lower sulphur content and higher direct refining yield of valuable products like transportation fuels has historically held a premium over heavier crudes. However, recent changes to flows of medium-heavy sour crudes, along with expectations for tighter global crude supplies in the short term, have skewed pricing. Heavier grades allow for significant processing gains on a volumetric basis (roughly 10%) in complex setups and give more flexibility in terms of product yields.
Data from Argus Media shows the price of (light sweet) WTI crude delivered to Rotterdam has fallen and stayed $2/b below the price to load medium-sour Johan Sverdrup crude from Norway, since early July.
This unusual inversion in the pricing of light sweet vs medium sour crude is just an example illustrating a broader global phenomenon, supported in recent weeks and months by announcements from Saudi Arabia and other Middle East OPEC nations – that primarily produce medium-heavy sour crude – to voluntarily cut production.
While the impact of production cut announcements on price has been somewhat muted, the impact on flows is clearer, especially when it comes to falling Asian imports of these crudes. This decline could be prolonged given the recent increases in Saudi (among other Middle East producers’) OSPs stemming demand and therefore imports.
Vortexa data shows Asian imports of medium-heavy sour crudes from the Middle East (excluding Iran) have fallen sharply from 11mbd in March to only 9.5mbd so far in July (day 1-10). The sharp drop in Asian imports of these crudes also reflects the sensitivity of demand in the region, along with India and China’s hike in imports of medium sour Russian crudes, like Urals, and China’s increase of Iranian crude imports.
Unlike Asia, Europe has broadly maintained its import levels, reflecting the need to maintain medium-heavy sour crude flows at or above the 2.5mbd level, in the absence of Russian supply.
LatAm displacement of Russian oil West of Suez
On top of steady Middle Eastern supplies, Europe is increasingly relying on LatAm medium-heavy crudes and US light sweet crude – largely a function of proximity and availability – to plug the absence of Russian crude. Similarly, for the US, the absence of Russian fuel oil has lifted fuel oil imports and medium-heavy crude imports from LatAm. However, the level of increase in LatAm supplies to US, UK and EU markets does not even come close to fully offsetting the drop in Russian supplies.
Looking ahead, especially given the most recent announcement by Russia to cut a further 500kbd of crude production, medium-heavy sour crude markets are set to tighten. This is compounded even further by recent refinery start-ups/ramp-ups in the Middle East (Jizan, Al Zour, Duqm), all of which likely constrain the availability of medium-heavy sour crude grades even further.