Efforts by OPEC members to restrain crude supply to offset growing volumes of unconventional crude resulted in a widely acknowledged effect on global crude prices. However, less attention has been given to the effect that this has had on medium crude prices.
OPEC’s crude basket is largely comprised of medium and heavy, high-sulfur grades. However, the growing supplies of crude from North American unconventional (LTO) production is largely light and sweet. As OPEC tried to offset additional volumes of LTO to keep the global crude market balanced, the effect translated into the tightening of medium sour crude supply.
Medium crude prices have tightened versus other grades
In 2017, the price of light sweet crude on the US Gulf Coast relative to Brent fell by approximately $2.50/barrel. However, medium sour crude prices, as reflected by the Mars market, have remained at a fairly consistent differential to Brent of about $3.50.
As OPEC has reduced its output of medium sour crude, more complex refiners have had to cast a wider net to secure supplies. As a result, we see growing volumes of medium and heavy sour crude moving to Asia from Latin America, and even the US.
For OPEC members, their actions have been dually beneficial – first by increasing global crude prices (as reflected by Brent prices) and, second, by decreasing the discount of medium sour crude.
For refiners, this is squeezing the economics of running medium sour crude and encourages an incremental shift toward processing more light-sweet crude.
Interestingly, we do not see a similar effect in heavy crude prices. Heavy crudes, especially the Maya benchmark grade, appear to be tracking movements in light-sweet crude prices at a constant (or widening differential). This suggests heavy crude suppliers may be pricing aggressively to compete with growing light crude supplies on the Gulf Coast.
Tim Fitzgibbon is a senior industry expert based in Houston.