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Page added on February 2, 2019

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The Great Oil Paradox


The shale boom has created a world awash with crude, putting a lid on prices and markedly reducing U.S. dependence on imported energy. But there’s a growing problem: America is producing the wrong kind of oil.

Texas and other shale-rich states are spewing a gusher of high-quality crude — light-sweet in the industry parlance — feeding a growing glut that’s bending the global oil industry out of shape.

Refiners who invested billions to turn a profit from processing cheap low-quality crude are paying unheard of premiums to find the heavy-sour grades they need. The mismatch is better news for OPEC producers like Iraq and Saudi Arabia, who don’t produce much light-sweet, but pump plenty of the dirtier stuff.

The crisis is Venezuela, together with OPEC output cuts, will exacerbate the mismatch. The South American producer exports some of the world’s heaviest oil and Trump administration sanctions announced this week will make processing and exporting crude far more difficult. American refiners are scrambling for alternative supplies at very short notice.

“We still have some holes in our supply plan” over the next 30 days, Gary Simmons, a senior executive at Valero Energy Corp., the largest refiner in the U.S., told investors on Thursday. “We are not taking anything from Venezuela.”

Crude isn’t the same everywhere: the kind pumped from the shale wells of West Texas resembles cooking oil — thin and easy to refine. In Venezuela’s Orinoco region, it looks more like marmalade, thick and hard to process. Density isn’t the only difference — the sulfur content is also important, dividing the market into sweet and sour crude. Heavy crude tends to have more sulfur than light crude.

As Saudi Arabia, Russia and Canada cut production, and American sanctions force Venezuelan and Iranian exports lower, the market for low-quality crude is feeling the impact.

“The strength in the physical crude market continues, led by sour crude shortages,” Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd. in London, said echoing a widely held view within the market.

For consumers and politicians focused on the headline oil price for Brent and West Texas Intermediate, the most popular benchmarks, it may not matter much. Car drivers could even benefit, because too much light-sweet crude often leads to too much gasoline, and lower prices. On the flip side, truckers may find themselves short-charged, as refiners prefer heavy-sour crude to make diesel.

To oil traders in the physical market, it provides opportunities for to profit from the changing price spreads between different crude varieties.

Few oil executives see the market changing anytime soon. The supply and demand balance could deteriorate further as OPEC deepens output cuts next month — Saudi Arabia has warned it will reduce production even further in February. Saudi oil exports into the U.S. last week fell to the second-lowest level in nearly a decade.

“OPEC cuts will sustain the tightness of heavy-sour crude,” Alex Beard, the head of oil at commodities trading giant Glencore Plc.

At the same time, U.S. shale production keeps growing, feeding the glut of light-sweet crude. The proportion of light crude in U.S. total petroleum output has risen to nearly 57 percent, up from 51 percent in early 2017, according to Bloomberg calculations based on U.S. Energy Information Administration data.

In the physical market, oil price differentials for some important varieties of heavy-sour crude — including Russia’s main export grade, Urals, and Mars Blend from the U.S. Gulf of Mexico — are at the strongest levels in five years, according to data compiled by Bloomberg.

Mars crude on Tuesday traded at a $5.85 premium to U.S. benchmark West Texas Intermediate, compared to a discount of $1.60 a barrel a year ago. Earlier this month, Heavy Louisiana Sweet crude traded at a rare premium to its sister variety Light Louisiana Sweet.

“OPEC is having the impact that they wanted in the physical market, which is tightening,” Marco Dunand, chief executive officer of commodities trader Mercuria Energy Group Ltd.

Heavy-sour crude is becoming so expensive — and gasoline refining margins are so low — that some U.S. refiners are running their most sophisticated kit at low rates in an effort to save money. Others are likely to follow.

The cracking margin for heavy-sour crude for the most sophisticated refineries in the U.S. Gulf of Mexico has fallen to about $2.50 per barrel in recent days, compared to a five-year average of $12 a barrel, according to data from consultant Oil Analytics Ltd.

The global refinery has no option but to adapt almost in real time. Valero is “changing the way it’s sourcing crude on weekly, daily basis to try to get the best netback we can on the plants,” Joe Gorder, chief executive officer, told investors on Thursday.


7 Comments on "The Great Oil Paradox"

  1. jawagord on Sat, 2nd Feb 2019 11:25 am 

    Gee wiz, if you were a heavy oil refiner and you had access to millions of barrels of low cost light oil what would you do? And if your refinery was in an area prone to flooding what would you do? OK most people posting here would light their hair on fire or babble on about a low carbon future but back in the real world…….

    Exxon Mobil Corp has begun groundwork at a Texas refinery that would become the largest in the United States….The expansion would increase crude processing capacity at its Beaumont, Texas, refinery by at least 300,000 barrels per day (bpd) from the current 365,644 bpd, the sources said.

    The proposed unit would convert crude oil from Texas shale fields into refined products, including diesel and gasoline. Exxon wants to triple daily crude production in the Permian Basin of West Texas and New Mexico to 600,000 barrels of oil equivalent by 2025.

    Another element of the company’s preparations involves raising the site to resist flooding. The plant was swamped and shut by torrential rains from Hurricane Harvey last year and was not able to be fully returned to service for 36 days.
    “They’re building up the soil 10 to 14 feet (3 to 4.3 meters),” one of the sources said.
    The ground-level increase would place the base of the new crude unit above the level of Harvey’s flood waters.

  2. Outcast_Searcher on Sat, 2nd Feb 2019 5:47 pm 

    It’s not as if oil of different weights can’t be shipped. It is every day. It’s not as if refineries can’t be tuned differently if the longer term balance of light to heavy crudes shifts.

    And if it costs a little more to refine a barrel, customers will pay. It’s not like a little extra cost is a big deal when prices are relatively cheap. Or even if they double, so what? It might help encourage people to more quickly transition to more fuel efficient vehicles.

    Funny, there never was a Garden of Eden where everything people needed appeared by magic, no effort required.

    Yet when effort and/or ingenuity is required, many write as though it’s a catastrophe.

    Given where we were in the 70’s with NG and oil prices looking scary, and supplies uncertain, we’re in relative paradise re available supplies. In fact, our biggest challenge is NOT to burn it all, re the AGW problem.

    No short term doom here, no matter how many times the fast crashers cry wolf.

  3. shortonoil on Sat, 2nd Feb 2019 6:31 pm 

    The alternative is the 70 Gb Alaskan, West Sak. Or buy Venezuela! EXXON kicked in its office change buckets! Venezuela’s 500 Gb oil fields are worth $12.5 trillion, above ground, at present market prices. A couple of the big boys could spare the change. This is a done deal, and this author shows up late too parties.

  4. shortonoil on Sat, 2nd Feb 2019 6:40 pm 

    PS How much would it cost to buy EVERY politician in Venezuela? Remember all that is needed is 51%. They’ll beat the rest of them to death with clubs! Old Aztec tradition!

  5. Free Speech Message Board on Sat, 2nd Feb 2019 9:55 pm 

    Since everything is illegal, maybe moral politicians are afraid to speak out against wars, debt, and the police state because they fear being prosecuted.

    Anyone who supports wars, debt, and tyranny gets a free pass.

  6. twocats on Sat, 2nd Feb 2019 10:34 pm 

    “No short term doom here, no matter how many times the fast crashers cry wolf.”

    and no short term doom mentioned until you brought it up. Are you hearing voices that aren’t there?

    An article about shrinking cracking margins. Interesting – certainly not doom-inducing.

  7. peak on Mon, 4th Feb 2019 9:40 pm 

    There were eras in earth’s history that sustained megafauna. That means available calories, biomass and natural carrying capacity were at least 10 times what they have been for the last million years. Peak paradise was 65 million years ago. Although the whole planet probably stank like dinosaur shit.

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