Refinery premiums cast doubt on speculators
By Javier Blas in London
Published: June 12 2008 18:44 | Last updated: June 12 2008 18:44
Refiners are paying record premiums for the high-quality crude oil they use to produce diesel and petrol, a sign of strong demand in the physical oil market that calls into question claims that soaring oil prices are being driven by speculators.
Refiners are paying up to $5-$6 a barrel on top of current record prices to secure high-grade oil, traders said, double the level of a year ago. The mark-ups are four times higher than the 2000-2008 average. The movement in prices paid for physical barrels of oil has gone largely undetected outside the refinery industry because financial markets pay almost exclusive attention to the price of oil futures traded in London and New York.
The fact that refiners are willing to pay a higher price for physical supplies than the futures benchmark lends weight to the argument that speculators are not the cause of record oil prices. At the same time, though, refiners are obtaining unusually large discounts for low-quality crude oil, traditionally refined into fuel oil. Traders said supplies of low-grade oil, typically produced in the Middle East, are relatively plentiful.
The premium for Nigeria’s high-grade Bonny Light oil has surged this month to $4 a barrel, up from $2.50 a year ago. In the same period, the discount for low-grade Iran Heavy oil has widened to $13.05 a barrel from $7.
The split in the physical market explains Opec’s reluctance to boost its production as most of the cartel’s spare capacity is of low-quality oil. However, the situation could change as Saudi Arabia plans to bring on stream its Khursaniyah high-quality oil field. It also highlights a lack of capacity at refineries that can turn heavy, low-quality oil into products such as diesel. Francisco Blanch, head of commodities research at Merrill Lynch, said the price of Middle East low-grade oil was falling behind because of refining bottlenecks.
“Middle East heavy crudes have been unable to keep up with the growing appetite for low sulphur middle distillates products, such as diesel,” he said, adding the difference between Saudi Arabia’s high- and low-quality oil was at a record high.
The scarcity of premium oil has been aggravated by shortfalls in Nigeria. |
