BIKE: OIl, or Light, Sweet Oil & Refining Crunch ?

[alan_drake]

Last summer there was a crunch in refining capacity for gasoline, combined with a rise in benchmark "light, sweet" oil.  Meanwhile the spread between light, sweet oil & sour or heavy or sour, heavy oil increased.

I think we are nearing a "World Oil Production Peak" for light, sweet oil and entering a "bumpy plateau" of oil production.  It will take tens of billions to rebuild & build refineries to handle the increasingly heavy oil mix.  Heavy & Sour oils have always been underpumped due to the difficulties in refining them, so there is no surprise that that the mix is going "heavy & sour".

In addition, Canada has plans to go from 1/2 million barrels/day of mined oil to 2 million.  Venezula is also producing 1/2 million barrels/day of tar/asphalt.

Adding to the refining shortage is the mid2006 change to zero sulfer diesel for road use (and later change for offroad use).  All the world's refineries are adding desulferization as fast as they can. (sour = high sulfer crude oil).

World oil production is ~82.5 million barrels/day.  I personally never expect it to reach 89 million b/day.  One reason is that conservation is cheaper than the price required to reach 89 million b/day.

The 1973 & 1979 oil price shocks have shown the demand for oil is quite inelastic in the short run (perhaps 10:1); but more elastic as time goes on (2.5:1 ?) because structural changes take place.  One of the structural changes is more electrified transit (DC Metro was built as a response to the 1973 Oil Embargo; it carries about 38% of the DC commuters).

However, with the expansion of the population and economy, there is a latent demand for more oil that can only be constrained by ever higher prices.  Thus, I see a "bumpy plateau" with an ever higher % from unconvential sources.

One side effect is that the gasoline fraction of refined oil will likely decline.  However, the 60 mpg turbodiesel BMW MiniCooper will likely be imported in 2007.  With the almost zero sulfer diesel available in 2007, additional pollution controls can be added.

New car sales in the EU are about 40% turbodiesel.

This is one reason that I recently bought a white 1983 Mercedes 240D with a manual transmission :-)

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Oil refiners unimpressed by Saudi output boost vow

Gulf Daily News 

Thur Sep 30, 2004

Original Story Here 

LONDON: The world's oil refiners are unimpressed by Saudi Arabia's boost to production capacity that would only swell supplies of sour, high sulphur crude while they hanker for sweet oil.

US oil prices still hovered near $50 yesterday, testimony to the indifference to Riyadh's pledge to hoist official production capacity by 500,000 barrels per day (bpd) to 11 million bpd.

"Most refiners couldn't take more sour if they tried," said one refiner, who asked not to be named.

"We have a glut of sour crude and a short supply squeeze on low sulphur crude oil and products, so extra Saudi makes no difference whatsoever," a physical oil trader said.

Riyadh's new increment, together with capacity expansions in Kuwait and Iran will add some 900,000 bpd of new sour crude capacity by year's end.

But the kingdom has made clear it will only tap its extra reserves if warranted by customer demand. Saudi Aramco's marketing plan for this month and next calls for production of 9.5m bpd.

New Saudi output would come courtesy of intensified drilling in the kingdom's oilfields, primarily new expansion projects at Abu Safah and Qatif, and yield mostly Arab Light - similar in density to North Sea Brent crude.

But analysts said it is still relatively high in sulphur and more difficult to refine into the low-sulphur products increasingly in demand for transport fuel.

"The impact on the market will be pretty negligible," said Seth Kleinman, analyst at PFC Energy in Washington. "The world is awash with sour because there is a dearth of desulphurisation capacity." 

The surplus of heavy sour crude, which has lower yields of lighter products, but is rich in heavy products like fuel oil, has sent sour grades diving to record low differentials against light sweet marker grades that have hit record highs.

Saudi Arabia's latest official selling prices for sales of its Arabian Heavy crude into the US have been set at $11.30 below US light sweet benchmark West Texas Intermediate, a fall of $3.35 compared with the level for May.

Desulphurisation capacity is being increased, but so is demand for low sulphur products as specifications are changed across the globe to introduce cleaner burning fuels.

The new oil from Saudi Arabia's Qatif field will be blended into Arab Light, while that from Abu Safah is Arab Medium.

Crude quality is based on density, measured by American Petroleum Institute gravity standards and the amount of sulphur it contains.

Arab Medium and Arab Light streams have respective APIs of 29-32 degrees and 32-36 degrees but relatively high sulphur contents of about 2.5 per cent and 1.5pc, respectively.

They would not make up for any major outage from Nigeria where unrest in the oil-rich Delta region is threatening to shut production of light sweet high quality crude.

Still light Saudi oil offers more hope than heavy sours of alleviating current high oil prices, which for light sweet benchmark Brent crude and US futures have hit record highs.

"(Qatif) offers the highest near-term hope of narrowing light-heavy differentials," Deborah White, senior economist at SG Commodities, said in a research note.