Kemp: OPEC Cuts Make Global Crude Supply Lighter And Sweeter

In the middle of November, shortly before the OPEC production-cut agreement, the Brent premium over Oman had shrunk to around $4 per barrel.

By Feb. 23, the Brent premium had narrowed to just 75 cents, though it has since widened modestly to around $1.25.

While the Brent futures curve is in contango between June and December, the Oman curve is flat, reflecting the anticipated tightness of supply in medium crude.

Refinery Blends

Most refineries are configured to operate on a fairly specific quality of crude (simple refineries generally need light, sweet oils while more complex refineries make most money from upgrading heavy, sour crudes).

Refineries are usually willing to buy a range of crude grades but will blend them to achieve a fairly steady quality of intake in terms of density and sulphur (a well as acidity and heavy metals content).

Asia’s big new refineries are designed to run on medium and heavy crudes and produce lots of diesel for local markets, so the reduction in OPEC production has left them scrambling to secure heavier grades.

Asia’s refineries are capable of processing light oils, but not as efficiently. Light oils also do not allow them to employ all the expensive capital equipment they have installed to handle discounted lower-quality crudes.

By contrast, North Atlantic refineries, which prefer lighter oils, are struggling to shift surplus stocks of gasoline and have no appetite to process more light oil.

And U.S. refineries are undergoing a heavy spring maintenance season, which has cut demand for light, sweet oils.

Surplus light, sweet oil is therefore being exported from the United States and competing with light oils from the North Sea, West and North Africa, depressing light, sweet prices.

At the same time, the quality premium for light crudes has eroded to make it worthwhile for Asian refineries to switch from heavier grades to process more light oils.

(Editing by Dale Hudson)