Heavier, sour US crude prices fall on high supply, global demand concerns

Values for heavier, sour crude oil grades available on the US Gulf Coast have dropped as the outlook for global demand deteriorates, production remains strong and the deadline to implement low sulfur standards for marine fuel approaches.

The front-month differential for benchmark medium sour crude Mars plunged to WTI plus $2.40/b on June 27, which was its lowest assessed level since August 28, 2018.

The Mars differential has recovered slightly in recent days, and was last assessed July 10 at WTI plus $3.65/b. However, Mars and other Gulf Coast sour crudes have been on a downward trajectory since May. The 30-day rolling average for the Mars differential is about $4.70/b. The previous 30-day average was about $5.65/b. Mars hit a four-year high in February, when it was assessed at WTI plus $7.90/b.

Several factors could be weighing on sour crudes in the US Gulf Coast, including a lack of demand and an overflow of output. The majority of US sour crude production comes from the Gulf of Mexico, which is producing around 2 million b/d of oil – and that output is growing.

Shell announced in May that production started at its Appomattox floating production system, months ahead of schedule. The deepwater Gulf of Mexico facility has an expected production of 175,000 b/d. The Mattox Pipeline, a 90-mile system with a 300,000 b/d capacity, will move Appomattox's output westward to the Proteus pipeline system, which moves Thunder Horse crude.

Price differentials for all crudes available on the US Gulf Coast have dropped as OPEC and its allies (OPEC+) recently struck a deal to extend oil production cuts, a move reinforced by concerns over a weak global demand outlook. As a result of faltering global demand, physical Brent and WTI crude also have decreased.

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Brent's premium over WTI last week shrunk to its narrowest point in several months. The Brent/WTI swaps spread narrowed to $5.67/b, before widening out again slightly to over $6/b.

A narrower Brent-WTI spread puts downward pressure on US Gulf Coast crude prices and could slow US crude exports as they become less competitive in the global markets.

Western Canadian crude weakens

Values for Western Canadian crude in the US Gulf Coast have also plunged. The differential for Western Canadian Select at Nederland, Texas, has fallen more than $6/b since reaching an all-time high of WTI CMA plus $3.75/b March 13 as demand for heavy crude in the US Gulf Coast spiked on the collapse of Venezuelan imports. Western Canadian Select at Nederland was assessed at a discount of $2.50/b on July 2, the low for the year, before rising to minus $2.35/b July 3.

Weekly US imports from Venezuela hit zero for the first time in the week ending March 15, according US Energy Information Administration data going back to 2010. That was down from about 587,000 b/d at the end of January, the data showed, before US sanctions took effect.

The weakening of WCS on the US Gulf Coast is partly due to more crude making it out of Canada via rail. Crude-by-rail exports out of Canada rose to 236,152 b/d in April from 168,483 b/d in March, according to the country's National Energy Board.

S&P Global Platts Analytics expects crude-by-rail exports out of Canada to rise to around 400,000 b/d by the end of year, barring an unforeseen increase in government production curtailments.

At the same time, the total amount of crude imported into PADD 3, which includes the US Gulf Coast, reached a four-week average of 893,000 b/d in the week ended June 7, the highest in a year.

Canadian crudes have gained interest from international buyers, particularly those in Asia, as the global market for heavy sour crudes remains relatively tight amid a series of supply-side events, including OPEC+ production cuts and Venezuelan political upheaval.

While differentials for crudes on the US Gulf Coast have been pulled down by the need to stay competitive internationally, the loss of heavier barrels from Venezuela and other OPEC countries has led some refiners to use Western Canadian heavy crudes as a substitute. “The value it’s at right now makes it an attractive export even though the Brent/WTI arbitrage isn't great,” one trader said of West Canadian heavies.

Sporadic flows of Western Canadian Select (WCS) and Cold Lake Blend (CL) have been observed going to China since 2018, according to market sources. The two Canadian heavy grades are viewed by refiners as a suitable substitute for Venezuelan Merey crude, as the grades yield high levels of asphalt.

Western Canadian Select generally has an API gravity around 21, with a sulfur content of around 3.59%, while Cold Lake Blend generally has an API gravity around 19 with a sulfur content around 4%, according to S&P Global Platts data. Merey crude has an API gravity around 15.9% and a sulfur content of 2.53%, while Venezuela's Boscan crude has an API gravity of 10.6 and a sulfur content of 5.38%, according to Platts data.