The plight of the light sweet crude barrel: Fuel for Thought

The word ‘glut’ is one of the more overused words in news stories to describe the global oil markets, but in the case of light sweet crude the moniker is true—much to the chagrin of OPEC.

This oversupply has persisted for over three years and despite recent moves by OPEC and 10 other oil producers, it continues with somewhat reckless abandon.

Refining oil that’s low in sulfur and boasts of low specific gravity can yield a good amount of gasoline and middle distillates, which are the main profit making products for the world’s refiners.

Specifically, crude oils with an API gravity of more than 31.10 and a sulfur content of less than 0.5% are considered light and sweet.

A decade or so ago, refineries wanted to process light sweet oil in order to reap the benefits of substantial volumes of middle distillates and gasoline. As a result, the crude held a premium price over heavier or sourer grades.

But this oil is no longer as attractive as it used to be. Many older refiners upgraded facilities by adding cokers, while newer ones have been made with better technology that have complex distillation units, which can process heavy sour crudes and still get a lot of gasoline and diesel, at much cheaper costs.

As a consequence demand for light sweets fell.

OPEC cuts and the light/heavy oil imbalance

Now eight months into the OPEC/non-OPEC deal, and the agreement has not yielded the desired affects, particularly because the cuts have proved toothless in tackling the imbalance of light and heavy crudes.

The cuts have largely come from oil producers that produce heavy and sour oil, and the glut of light sweet oil remains.

Libya and Nigeria, the two countries exempt from the deal, produce mainly light sweet crude, and with production in both recovering, this imbalance has been further skewed.

Libyan output is now at four-year highs and Nigerian production is close to 18-month highs.

To make matters worse, 2017 has also seen the resurgence of shale oil, resulting in yet more light more sweet oil, in a market awash with oil of this quality.

The sharp increase in US oil output over the past decade has severely impacted the light sweet crude balance.

And, the last few months have shown that deeper OPEC cuts are unlikely to change this imbalance.

There are some signs that Libya and Nigeria might be brought into the cut commitment fold once their production is sustained at higher levels but that is not expected soon.

A lot hinges on the pace of US tight oil output in the years to come.

The dramatic rise of US tight oil output had a profound impact makeup on the US import market, affecting the direction of crude flows all over the world.

Light sweet crudes that would normally command a premium over Platts Dated Brent have seen their values fall steadily, which has contributed to much narrower sweet and sour spreads.

Analysts have said one of the only avenues for these light sweet barrels to sell faster is for the price differentials of such crudes to fall even further, and make them more competitive with their sour counterparts.

This is starting to happen as the spread between light sweet and heavy crudes is narrowing as evident in Brent-Dubai EFS, which was over $2.5/b in early November 2016 and is now under $1.5/b.

Encouraging signs

When OPEC/non-OPEC decided in late-May to prolong the cuts until March 2018 it was betting on higher crude oil demand for the second half of the year.

And, there are signs that this is happening as can been seen in the physical oil market with stronger demand observed for sweet crudes.

Strong gasoline and diesel crack spreads are beginning to entice global refiners to lap up these crudes and keep runs high.

The Atlantic Basin crude market is a prime example.

The beleaguered Nigerian light barrel is suddenly in demand as a stronger middle distillate and gasoline complex is making such crudes more appealing to refiners.

Nigeria’s flagship crude Qua Iboe has seen its premium to Dated Brent widen to $1/barrel, its highest since January 2016.

This is seasonally a time when global demand and refinery runs are very high so it is not entirely surprising.

Refiners from a number of regions are scrambling to take advantage of buoyant margins before the onset of autumn maintenance.

Upcoming field maintenance in the North Sea and the ongoing driving season is also providing some support, the question is whether it can last long enough to become a trend.

The petrochemical feedstock naphtha, is considered the bellwether of a strong economy, and with a buoyant market at the moment backed up by strong Asian consumer demand, there may be some ‘light’ for this ‘glut’ at the end of the tunnel after all.