Output cuts in oil-rich Alberta and Saudi Arabia result to leaving heavy-crude refiners from the Gulf of Mexico to Asia in a challenging position. The Saudis are expected to mostly focus on paring output of heavy crude as they lead efforts to rebalance the global market, according to Bloomberg. Although curtailments in Canada have driven local prices at a record in almost a decade, others as Arab Heavy and Heavy Louisiana Sweet are also gaining a powerful position.
John Auers, executive vice president at energy consultant Turner Mason & Co. in Dallas stated that usually when Saudis cut output, it results to heavy and medium crude.
Meaning that more of the 10% of the world’s refinery supplies that are already growing scarce with Venezuela’s collapse, will probably be even harder to come by.
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As Bloomberg reports, the majority of heavy crude globally, is processed in the US output cuts in oil-rich Alberta and Saudi Arabia are combining to leave heavy-crude refiners from the Gulf of Mexico to Asia in a bind.ou
Yet, in Canada, heavy-crude prices have been forcefully increased since the previous month when Alberta Premier Rachel Notley mandated a production curtailment of 325,000 barrels a day starting in January to alleviate a pipeline crunch.
Moreover, Western Canadian Select traded at a discount of just $6.95 to West Texas Intermediate light crude, the smallest gap in almost a decade and not big enough to cover the cost of rail or most pipeline shipments to the U.S. Gulf Coast. That’s down from as much as $50 in October.
In the meantime, Saudi Arabia limited its crude outflows by almost 500.000 barrels per day in December and exports are to tumble on January because of an agreement by OPEC and its allies to decrease production by 1.2 million barrels a day after oil prices collapsed late last year.
In Venezuela crude exports decreased to a 28-year low in 2018 because of political strife and economic collapse.
Although usually Heavy Louisiana Sweet trades at a discount to Light Louisiana Sweet, it was trading at 45 cent on January 11, the biggest premium since March.
Saudi Arabia set the official selling price for its Arab Heavy grade for February to the U.S. at a 50 cent premium to the Argus Sour Crude Index, the first premium in at least 10 years.
- Asian Market
Asia will be seriously affected if the Saudis cut the medium and heavy crude.
However, that could widen the Dubai-WTI spread and create arbitrage to ship Gulf of Mexico crudes to Asia.
Refiners along the Gulf Coast and in the Midwest invested billions of dollars in cokers and other heavy-oil processing units over the past three decades anticipating supplies of light oil would become scarce while heavy crude from Canada’s oil sands, Venezuela and Mexico would grow. Yet, the opposite occurred.
- Mexican Market
There is a high possibility that American refiners will turn to Mexico.
The premium of Mexico’s Maya to Canada’s WCS has fallen to about $10 per barrel, the narrowest since May, from about $50 three months ago.
But the heavy-crude rally could be short-lived as the market starts to prepare for new IMO specifications for ocean-going ship fuel that will take effect next year.
