Monday, March 14, 2005

Making money on heavy sour cude

'Sour' oil fetching profit for refiners
Like bartenders putting cheap alcohol into their cocktails, some U.S. oil refiners are reaping huge profits these days by relying on lower-quality crude to make everything from gasoline to diesel.
It’s interesting to see how big the price differential between light sweet crude and heavy sour crude has gotten. We’re talking discounts of between 15% and 35%. Normally, these run 5% to 10%.

I can think of a couple of possible reasons why things have changed.

First, from the supply side, the new supplies are coming in the form of heavy sour crudes, primarily from Saudi Arabia. Any supply that was held off the market was probably the heavy sour type. That’s because the lighter stuff sold at a premium and the OPEC quotas didn’t take crude quality into account when parceling out quota. Given a choice, you hold the heavy and sell the light because it gives you more revenue.

Second, a big part of the price run up is being driven by demand. Worldwide demand is now 84 million barrels per day (Mbpd). A few years ago it was 75 Mbpd. The additional demand is coming from countries that don’t refine oil very well. It takes extra equipment, processing, time and expertise to refine heavy sour crude as opposed to light sweet crude. Hence, they’d rather have the light sweet crude.

Also, if you want maximum output, you need to use a light sweet crude. In those countries where demand for petroleum products is increasing rapidly, the fastest way to expand refining capacity is to use a lighter sweeter crude.

US refineries have been switching over to handling heavier sour crudes for some time now. On the west coast, one reason is that North Slope (Alaskan) crude is heavy and sour and the oil companies were not allowed to sell it to anyone other than US refineries. Around the Gulf coast, it was easy to get Venezuelan crude (it’s right across the gulf). However, it’s heavy and sour. PDVSA, the Venezuelan national oil company even invested in US gulf coast refineries so that they could handle Venezuelan crude.

Now the US refineries are reaping the rewards of prior investments. For the US economy it also means that $50 oil isn’t really $50 oil. It’s more like $42 oil. At 18 Mbpd or so, that $8 a barrel is $50B a year in lower costs.

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