This is very good news for VLO but the market doesn't care for the moment.
"In particular, Middle East heavy crudes have been unable to keep up with the growing appetite for distillate, with differentials between Saudi Super Light and Saudi Heavy widening to record levels. In the Americas, the situation is no different. Despite the large production declines at Cantarell, Mexican Maya is trading at a record discount to Olmeca crude oil."
Heavy crude can't keep up
Author: Moussa Ahmad
Source: BI-ME
Published: 08 May 2008
INTERNATIONAL. As medium sweet crude oil blends have strengthened in recent months, medium and heavier sour blends have fallen behind. In particular, Middle East heavy crudes have been unable to keep up with the growing appetite for low sulphur middle distillate products, with differentials between Saudi Super Light and Saudi Heavy crude blends widening to record levels. In the Americas, the situation is no
different. Despite the large production declines at Cantarell, Mexican Maya is trading at a record discount to Olmeca.
Medium sweet crudes are becoming a preferred blend
Of course, light sweet crudes continue to hold a premium over any other grades. But some of the naphtha and gasoline-rich crudes have lost their relative strength as the prices of light refined products have faltered. Instead, medium sweet crude blends have been the big winners in recent months due to the strength of the diesel and jet fuel cracks. The high distillate content of medium sweet grades, coupled with the fact that they do not take up as much desulphurisation capacity, has turned these crudes into the preferred blend for many producers.
Global refining bottlenecks are at the heart of the problem
A report from Merrill Lynch Commodity Research.says that the breakdown of the seasonal link between gasoline and gasoil suggests that the global refining sector is disjointed. Naphtha cracks have also fallen behind while residual fuel oil cracks have hit record lows across the board, as supply of residual fuels has continued to exceed demand. Only diesel and jet fuel are helping to keep refining margins above water. In our view, this situation is unlikely to change in the next two quarters and the gasoil to residual fuel oil
spread will likely remain very wide. In turn, this wide spread will provide support to medium sweet grades around the world in detriment of heavier, sourer grades.
Middle distillate demand is pulling up medium sweet crudes
The most recent numbers from the International Air Transport Association (IATA) suggest a modest deceleration in passenger demand from about 9.2% year on year growth in February to about 5.8% in March, possibly linked to the surging oil prices and the ongoing credit crunch. Still, globalisation is an energy-intensive process, and transportation demand is still expanding at a healthy rate around the
world. The surge in demand for air, road, rail and sea transportation has continued to push up jet and diesel consumption in the last few years.
Similarly, a string of electricity bottlenecks in a number of emerging markets has pushed up the demand for oil-fired power generation, contributing to drive up the demand for gas oil. Coupled with significant supply constraints at refineries, the most recent surge in middle distillate demand has pushed up prices for petroleum products at the centre of the barrel. As a result, middle distillates are now leading the petroleum complex (Chart 3). In turn, the market leadership of distillates, coupled with the lack of flexibility at refiners, has had a significant impact on the global crude oil markets.
Sulphur content in crude is again more important than gravity
While light sweet crude blends such as WTI or Brent are still very attractive for refiners because of their light petroleum product content, medium and even heavier sweet blends have again picked up steam in recent months. In particular, sulphur content more than gravity now determines the price pecking order for the various crude blends in the United States. In effect, the price of medium sweet blends has been converging towards the levels of light sweet blends such as WTI crude oil as demand for low sulphur middle distillates has increased. In contrast, gravity is not so much an issue, particularly because refiners have been keen to snap up medium grades to increase their diesel and jet fuel yields. Fast growing transportation demand is pushing up demand for jet fuel, diesel around the world.
Due to refining constraints, heavier crudes are falling behind
As the sweet medium blends have strengthened, the medium and heavier sour blends have fallen behind. The high content of residual fuel contained in these blends is to blame for the lack of refinery interest in the heavier crudes. In particular, Middle East heavy crudes have been unable to keep up with the growing appetite for distillate, with differentials between Saudi Super Light and Saudi Heavy widening to record levels. In the Americas, the situation is no different. Despite the large production declines at Cantarell, Mexican Maya is trading at a record discount to Olmeca crude oil.
Light sweets are still strong but medium sweets have picked up
Of course, light sweet crudes continue to hold a premium over any other grades, but some of the naphtha and gasoline-rich crudes have lost their relative strength. This is because the prices of very light refined products such as liquid petroleum gases, naphtha or gasoline have faltered. Instead, medium sweet crude blends have been the big winners in recent months in part as a result of the strength of diesel and jet fuel cracks. Due to their high middle distillate content, medium sweets have become a preferred blend for many refiners around the world, propping up medium sweet crude oil prices. In the United States, sulphur content determines the price pecking order for the various crude blends.
In particular, Middle East heavy crudes have been falling behind, with differentials widening to record levels.
Despite strong demand, the global refining sector is disjointed
The weakness in gasoline just as we enter into the US driving season is at the heart of the problem. In effect, the breakdown of the seasonal link between gasoline and gasoil suggests that the global refining sector is disjointed. As global demand growth for diesel surpasses gasoline, any attempt to produce additional units of diesel inevitably results in an increase in gasoline production due to limited fuel switching capacity. In a perverse way, the higher diesel crack spreads go, the greater the downward pressure on gasoline cracks. It will take years to resolve the current situation.
Residual fuel, naptha, LPGs and now gasoline not adding value To date, gasoline crack spreads have already fallen behind substantially on a seasonally adjusted basis, and are unlikely to experience much upward pressure in the coming month. In part, a surplus of ethanol production and weak US gasoline demand growth are helping to keep the market well supplied. Naphtha cracks have also fallen behind from US$3.2/bbl in December last year to US$8.3/bbl in April 2008 on the back of a growing supply/demand imbalance. Similarly, residual fuel oil cracks have hit record lows across the board in Europe, the United States and Asia, as supply of residual fuels has continued to exceed demand. Of course, light sweet crudes continue to hold a premium over other grades.
Only diesel, jet are helping refining margins thus pushing up medium sweets
Thus, only diesel and jet fuel are really helping keep refining margins above water. The inability of refiners to turn more gasoline, naphtha or residual fuel oil into jet and diesel has now pushed the gasoil to fuel oil spread to record levels. Merrill Lynch said this spread is unlikely to contract much until a substantial amount of new cracking and coking capacity comes on line in 2009-2010. In turn, this situation will likely continue to provide support to medium sweet grades around the world in detriment of heavier, sourer grades.
Gasoline crack spreads have fallen behind substantially on a seasonally adjusted basis, and are unlikely to recover. |
