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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Is There Too Much Light Crude On The Market?

A lighter crude oil grade is being sold from the Permian, Bloomberg reported earlier this week, noting it was selling at a discount to the regional benchmark, WTI Midland. It sounds counterintuitive: lighter grades should be more expensive than heavier ones, right? Apparently, wrong. There may be too much light crude on the market.

The new grade, Bloomberg cited sources as saying, has a gravity of some 45-50 API, which brings it closer to condensates, unlike the WTI Midland gravity, which is between 38 and 42 API. The lighter crude is being blended with other local grades, the sources also said, and shipped at a rate of 100,000 bpd into storage.

The Permian, and the shale patch as a whole, is light crude land. That’s why U.S. refiners import their heavy, which they need to produce fuels and oil products different from gasoline. The problem for light crude producers is that the oil product market is changing, and chances are refiners would have a greater need for heavier blends than light ones.

In a recent article for Forbes, Wood Mackenzie’s VP for Chemicals and Oil Markets, Alan Gelder, warned that U.S. refiners may very soon find themselves struggling with excess production of gasoline that exceeds demand for the fuel. At the same time, to make matters worse, the production slump in Venezuela is reducing the availability of heavy crude needed for middle distillates, not to mention that not all U.S. refiners have upgraded their facilities to produce more low-sulfur bunkering fuel products.

Remember middle distillates? The oil products that everyone is forecasting will drive demand for crude in the coming years, especially after the International Maritime Organization’s new emission rules come into effect in January 2020, spurring demand for low-sulfur diesel fuel. But making diesel requires heavier crude, not lighter.

So, what’s the significance of this new Permian grade, although “new” is probably not accurate: the crude has been produced in the Permian for a while now. The significance lies in the fact that with the Permian’s booming oil production, more grades are getting separated. And since there is only a limited amount of them that can be taken in by local refineries, there will be a greater variety of light crudes for export.

Related: The Dark Horse Of The Oil Price Rally

Export is the key. While local production would probably never be enough to make the United States completely self-sufficient because of that same grade issue, it could certainly drive higher exports. Earlier this year, U.S. crude oil exports hit a record 2.2 million bpd. The figure was hailed as the beginning of a new era that could eventually see the world’s top consumer—and top producer for this year so far— export up to 4 million bpd. All this will be light crude, it seems.

For exports to really take off, producers need two competitive advantages: price and quality. The price will go down as production goes up and when it comes to quality, this new differentiation among Permian grades could be potentially crucial for future supply. As the research director of Morningstar, Sandy Fielden, told Bloomberg, "The U.S. has to be competitive in price, a key driver of crude exports. But it’s more convenient for producers and refiners if the U.S. can compete on quality."

By Irina Slav for Oilprice.com

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