The global chasm in crude oil quality supply shows no signs of narrowing, prompting refiners to lighten their slate and leading to a market awash with gasoline , naphtha and LPG. New restrictions next year on the amount of sulfur in global marine fuels may mean refiners buy even more US shale oil , but this may not put an end to a saturated light ends market. Much hinges on demand. The meteoric rise in US production over the past decade — almost doubling to record highs of around 12 million b/d — shows little sign of slowing in the near term. As light sweet US shale floods the market, producers of heavier, more acidic varieties have been cutting back due to OPEC-led output cuts to the tune of 1.2 million b/d. US sanctions on key exporters like Venezuela and Iran have
Paul Hickin and Eklavya Gupte considers the following as important: Brent, gasoline, naphtha, oil
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The global chasm in crude oil quality supply shows no signs of narrowing, prompting refiners to lighten their slate and leading to a market awash with gasoline , naphtha and LPG.
New restrictions next year on the amount of sulfur in global marine fuels may mean refiners buy even more US shale oil , but this may not put an end to a saturated light ends market. Much hinges on demand.
The meteoric rise in US production over the past decade — almost doubling to record highs of around 12 million b/d — shows little sign of slowing in the near term.
As light sweet US shale floods the market, producers of heavier, more acidic varieties have been cutting back due to OPEC-led output cuts to the tune of 1.2 million b/d.
US sanctions on key exporters like Venezuela and Iran have choked off more than 1 million b/d and even cuts from the US’s northern neighbor Canada have tightened the sour oil market.
There appear few answers to the supply side of the ledger.
Even oil’s supermajors, once burned by forays into the Permian and other important shale plays, are muscling in once again on the US independents, while Middle Eastern producers are reluctant to cut back on what little sweet crude they export.
Saudi Arabia and their Gulf allies are tacitly benefitting from higher prices for their heavier grades.
Iran is likely to suffer further sanctions misery in May when the exemptions granted in November are most probably eased, while the full force of sanctions of state-owned PDVSA will be felt in the months ahead.
The demand side, while complicated, could provide some respite to an off-kilter market.
At the refinery level, there has been a changing diet to lighter, sweeter crude . This has been more challenging for the swath of sophisticated refineries which had invested in equipment to handle thicker, sourer varieties only to find themselves paying relatively higher prices.
The spread between the light sweet S&P Global Platts Dated Brent benchmark and the medium sour Platts Dubai measure has narrowed considerably in the past few years, reflecting the growing disparity between sweet-sour grades.
The Brent /Dubai Exchange of Futures for Swaps (EFS), which is a key indicator of ICE Brent’s premium to benchmark cash Dubai prices , has been paper thin. The Brent /Dubai EFS has averaged around 50 cents/barrel this year compared to $3.75/b in 2016, S&P Global Platts data shows.
In Europe , naphtha cracks have been averaging minus $8-$9/b to Dated Brent so far this year, the lowest since 2009, according to Platts data.
“Lighter average crude quality is increasing the supply of naphtha, but tightening residual fuel until IMO 2020 frees up high sulfur fuel oil,” S&P Global Platts Analytics said in a recent note.
There is no doubt that demand for less sulfurous products is shifting, in particular less demand for fuel oil used in shipping as the International Maritime Organization ’s 0.5% sulfur cap comes into force at the start of 2020 from the current 3.5% limit.
Refiners will have to meet additional shipping demand for diesel and low sulfur vacuum gasoil by snapping up lighter, sweeter crude and producing less fuel oil .
Refineries becoming more complex can convert residual fuel oil into more valuable products, with companies such as Saudi Aramco telling Platts recently that it is targeting zero fuel oil output by 2024.
But this doesn’t solve the riddle and may only exacerbate the glut in gasoline, jet fuel and naphtha.
Looking at the proportion of products that come from a typical barrel of US shale oil and a typical barrel of heavier sour crude, the former can be almost 90% middle distillates or lighter, while the latter produces around 50% fuel oil. Moreover, greater refining of middle distillates will tend to mean more gasoline and naphtha is also produced.
The recent International Energy Agency “Oil 2019” report doesn’t suggest the excess gasoline and light end cousins will be mopped up that easily.
Demand growth for gasoline — the world’s most popular transport fuel — is expected to slow to below 1% a year to 2024 due to efficiency improvements and new fuel economy standards
Wider spreads needed
However, aviation and petrochemicals makes for lighter reading, with a 1.9% a year growth in jet fuel demand over the next five years and a 2.6% a year rise in LPG, ethane and naphtha demand in that period.
”Wider spreads between light, sweet products and heavy, sour ones will be required to allow more expensive rebalancing steps to be carried out economically,” wrote S&P Global Platts Analytics’ Rick Joswick in the latest Turning Tides special report.
So while the looming IMO decision will encourage a shift to consume US shale and other light sweet grades, it could also lead to a gasoline glut as global demand across the barrel is predicted to slow down.
The newer price dynamics for premium products may indeed become the new normal, with price once again the ultimate arbiter.
One thing seems certain in the years ahead: crude quality and the fungible nature of crude can no longer be taken for granted.
The post IMO 2020 may not solve crude oil quality riddle: Fuel for Thought appeared first on The Barrel Blog.