Lacklustre gasoline demand growth, particularly in the United States, and fears of a repeat of last year's poor summer gasoline profits, led refineries in the Atlantic Basin to skew their yields in favor of distillates, by running heavier oil. Strong profits for fuel oil has also encouraged refineries to run sour crudes.
This has compounded supply cuts, which were concentrated in heavier oils, to keep sulphur-rich crudes, normally shunned for lighter, easier-to-process alternatives, at the top of the heap.
Since OPEC-organized cuts began siphoning some 1.8 MMbpd from the market in January – nearly all of it medium and heavy oil – the so-called "heavy" or "sour" grades have become the most sought-after barrels.
Normally, refineries would snap up easier to process light grades before the summer, when they aim to run the gasoline-rich crude so they can sell the fuel to holidaying drivers. But now, in the middle of July, sour grades are still so sought after that differentials are hitting multi-year highs. "Sour grades are like gold dust at the moment," one oil trader said. "There's a need to fill in more sour grades heading to the U.S. and there is huge demand from the East."
Differentials for Urals, a sour grade exported from the Baltics and the Black Sea, are trading at their highest level versus dated Brent in two years, while light grades nearby such as CPC Blend and Azeri are at two-year lows.
North Sea Ekofisk, a light crude coveted for its high gasoline yield, is also trading at its largest discount to sour Forties in two years, as are differentials for Angola's Cabinda. Despite a summer slowdown in loadings for China, a key buyer of Angolan oil, U.S. and Indian loadings rose to their highest in roughly a year, according to Reuters tracking.
"It's an oversupplied sweet market, but a tight medium and heavy sour market," said Ehsan Ul-Haq, director of crude oil and refined products at Resource Economist Ltd.
Most of the oversupply – including millions of barrels from Libya and Nigeria which are exempt from the OPEC production cuts, and output from U.S. shale – is light crude oil.
At the same time new and sophisticated refineries in India and China – designed to run sulphur-rich crudes – are ramping up production. India's IOC bought its first sour crude oil cargo from the U.S. last week.
Ul-Haq added that since refineries are poised to start producing heating oil for winter demand, refineries could look for even more sour oils, threatening more tightness.
Still, Ul-Haq added, the sour premiums are limited comfort to those selling the oil, including Saudi Arabia, Venezuela and Angola.
"The Saudis should be happier than Nigerians but a price below $60/bbl is still a headache," he said.
Benchmark Brent crude was below $48/bbl on Thursday.
