Saudi Arabia’s solo move to boost output is widening the price gap between undersupplied light crude and abundant lower-quality oil, and will force producers to offer their heavy grades to customers at deeper discounts.
Lower relative values for high-sulphur crude hurt most members of the Organization of the Petroleum Exporting Countries (OPEC) and benefit refiners that have the upgrading capacity to process heavy oil into light fuels.
“The sweet-sour spread is going to widen because we are going to have to cope with more heavy crude in a market that needs light sweet grades,” said Tony Nunan, a risk manager with Tokyo-based Mitsubishi Corp. “The Saudis are not going to force additional barrels into the market. The best thing for them is to just say it’s available, hoping that (futures) prices don’t rise too much.”
Saudi grades are similar to those pumped by the Kingdom’s Gulf OPEC allies and by members that blocked an output increase at the group’s meeting in Vienna this week. Those include Saudi rival Iran and its ally Venezuela.
Top exporter Saudi Arabia will boost production in July to 10 million barrels per day (bpd), al-Hayat newspaper reported. The Kingdom’s oil minister, Ali Al Naimi, made it clear when he left the meeting that requirements would be met despite the lack of an OPEC accord to raise output.
Saudi Arabia’s spare capacity is mostly of sulphurous crude, of little use for simple refiners who need lighter grades to substitute Libya’s high-quality output. To prevent a further collapse of sour crude differentials, Saudi oil giant Aramco must reallocate sweeter supplies for export and earmark incremental output of heavy grades for domestic power generation as summer demand peaks.
“There is too much Arab Heavy,” said a trader with a refiner that buys Saudi crude in northeast Asia. “Even before the OPEC meeting, I have been hearing that they had been offering more barrels to some end-users.”
Confirmation that additional Saudi supplies are on the way came, when industry sources said it had offered extra crude of all grades to Asian refiners in July.
A few refiners were interested in buying more, and India’s MRPL has bought a small cargo of about 600,000 barrels of extra Saudi oil for July from Aramco, two sources with knowledge of the matter said. But most refiners had already covered their needs and declined the Saudi offer.