Analysis-Severe oil shortage means higher costs for shippers, road builders By Reuters

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By Robert Harvey and Arathy Somasekhar

LONDON/HOUSTON (Reuters) – Mexican export curbs and a rerouting of Canadian production are shrinking already limited supplies of heavy crude in the Atlantic basin, raising refinery costs, with a likely knock-on effect on sectors ranging from shipping and construction to the mid- and coastal sector. Eastern Power Plants.

Long-term OPEC supply cuts and international sanctions on Venezuela, Iran and Russia had already led to shortages of heavier crude, with the complex refineries built to process it, such as those in the US Gulf, struggling to produce cheap find supplies.

Heavy sour crude oil produces more residual fuel oil that is either upgraded to higher value road fuels or converted into marine fuels and bitumen.

“The combination of tighter supplies of heavy crude and fuel oil, as well as the seasonal increase in power generation demand, is expected to increase fuel oil cracks in the coming weeks,” said Vortexa analyst Xavier Tang, referring to the spread between the price of crude and the refined product.

More marine fuel oil is needed for ships making longer voyages around Africa to avoid the Red Sea area, while Saudi Arabia burns more fuel oil for air conditioning in the summer and demand is also increasing due to increased construction and road building activities.

Mexico in April cut crude oil exports to allow for higher domestic processing as the country seeks to end its costly dependence on fuel imports. That further threatened sour supplies in the Atlantic Basin, where refineries are preparing to open the Trans Mountain pipeline expansion, which will bring more heavy Canadian crude to the Pacific Ocean.

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Heavy crude prices in the US Gulf soared as refiners looked for replacement supply, with Mars grade hitting a near four-year high against WTI on April 1, according to LSEG data.

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“U.S. Gulf refineries have a much more expensive Canadian feedstock available through pipelines, they have less Mexican feedstock available, and as a result other heavy sour options are significantly more expensive,” said Viktor Katona, chief crude analyst at Kpler.

In Europe, the Argus Sour index – which includes Norwegian flagship Johan Sverdrup – hit a 14-month high in mid-April and is still trading roughly in line with Brent’s mildly sweet benchmark, according to pricing agency Argus Media.

Although prices cooled slightly as Mexican domestic demand for crude rose less than expected, freeing up more for exports, the sour market remains structurally tight.

“Global crude shale is becoming lighter and sweeter as a direct result of limited OPEC production, while non-OPEC+ countries are supplying increasing quantities of lighter, sweet crude,” said Jay Maroo, head of market intelligence at Vortexa, referring to the Organization of the oil exporting countries and their allies such as Russia.

“Unless there is a major change of course by OPEC, it is difficult to see that trend reversing.”

Light and medium sweet products have accounted for more than 50% of European crude oil imports since 2019, according to Kpler data. Medium and heavy acid wines made up just 26% of the continent’s imports in the first four months of 2024, the lowest since at least 2012.

BALANCE EXERCISE

Crude oils with high density and higher sulfur content are more difficult to refine and therefore usually cheaper than lighter oil. The higher prices are a particular problem for refineries that have invested in expensive upgrade units that allow them to process the heaviest grades.

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“The lack of heavy sour crude goes directly against refinery profitability and is a waste of capital investment for complex refineries,” said Patricio Valdivieso, vice president of oil market analysis at Rystad Energy.

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Refineries will have to adapt to a shortage of heavy crude such as Mexican Maya by blending other similar grades that suit their configuration, said Hillary Stevenson, director of IIR Energy.

Taking advantage of the relative abundance of light crude could prove financially and operationally difficult for U.S. refiners.

“If they try to go lighter, the end effect would be lower profitability,” says Rommel Oates, founder of Refinery Calculator, adding that a lighter forage diet can affect the stability of a refinery’s downstream units.

Refineries can balance a lighter crude diet by feeding residual fuels into secondary units. Refineries in the U.S. Gulf states could process up to 50,000 barrels per day of additional Mexican fuel oil to replace heavy crude, according to FGE analyst Francisco Goncalves.

That may not be possible for European refineries, which would struggle to process such heavy sour fuel oil into road fuels, Kpler’s Katona added.

Before 2022, Russia was the main source of heavy fuel in Europe, but the G7 embargo over the invasion of Ukraine has cut off access to refinery feedstocks such as vacuum gas oil and direct fuel oil.

In northwestern Europe, crack spreads for high-sulfur fuel oilers against Brent futures reached their highest level since Jan. 4, with a discount of about $11 on Wednesday, according to Argus Media price data.

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“A tighter heating oil market certainly also plays a role,” says Sparta Commodities analyst Neil Crosby.

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