OPEC+ production cuts have caused a surge in sour crude oil prices globally. This has disrupted the usual price dynamics among different types of crude oil.
Traditionally, light and sweet Dated Brent (a global benchmark) has held a price premium over the medium and sour Dubai Fateh. With these shifts, from June 21 to September 19, Dubai Fateh maintained an average premium of $0.48 per barrel compared to Dated Brent, according to EIA.
In North America, the price difference between medium and sour Mars crude oil and the light and sweet Magellan East Houston (MEH) narrowed in late 2022, with Mars even briefly surpassing MEH in July 2023.
While the price gap between the two has expanded recently, it remains below earlier 2023 levels. Significantly, most Saudi oil is sour, containing more than 1% sulfur. As a result, production cuts have exerted stronger upward price pressures on sour crude oil than on sweet crude. Additionally, Saudi Arabia raised the official selling price (OSP) of its medium, sour crude oil, Arab Light, for Asia and Europe, further boosting the price of sour crude oil.
Similarly, the price of Norway's Johan Sverdrup oil, another medium sour crude, saw a change due to increased demand from refineries seeking limited supply.
This upheaval in crude oil prices is largely attributed to decisions made by OPEC+ in June 2023.
The coalition announced an extension of crude oil production cuts into 2024, predominantly impacting sour crude oil supplies.
In addition to OPEC+ reductions, Saudi Arabia independently slashed its crude oil production by 1 million barrels per day in July.
The nation then prolonged these cuts multiple times, intending to maintain them until the end of 2023.
In August, OPEC's crude oil production averaged 27.0 million barrels per day, its lowest since August 2021, and Saudi Arabia's production plummeted to 8.7 million barrels per day, the lowest since May 2021.
Why Light, Sweet Crude Oil Commands a Premium
Crude oil is a complex mixture of hydrocarbons, and its quality and characteristics can vary widely depending on its source. The classification of crude oil based on its density and sulfur content helps in understanding its quality and the refining process it might require.
Density of Crude Oil: This is typically measured in terms of its API gravity, which is a scale to measure the density of liquid petroleum products.
Light Crude Oil: Has high API gravity, meaning it is less dense. This type of oil flows easily and is simpler to refine.
Medium Crude Oil: Falls in between light and heavy oils in terms of API gravity and refining complexity.
Heavy Crude Oil: Has lower API gravity, is denser, and typically requires more processing to extract valuable products from it.
Sulfur Content of Crude Oil: The sulfur content determines how "sweet" or "sour" the oil is.
Sweet Crude Oil: Contains relatively low amounts of sulfur. The term "sweet" originally referred to the pleasant taste of low-sulfur oil to oil prospectors. Sweet crude is easier and cheaper to refine since there's less sulfur to remove.
Sour Crude Oil: Contains higher amounts of sulfur. This type of oil requires more processing to remove the sulfur, which can cause environmental issues when burned, and can corrode refining equipment.
Sweet crude oil represents an easier process
Cost of Refining: Light crude oils are less dense, so they're easier to refine. Sweet crude oils contain less sulfur, which means there's less sulfur to remove during refining. As a result, light, sweet crude oils are generally cheaper to refine compared to heavy, sour crudes.
Valuable Products: Light crude oils produce a higher yield of valuable products like gasoline, jet fuel, and diesel when refined. Since these are high-demand products, refineries prefer crudes that produce more of these end-products. Sweet crudes, with their low sulfur content, also produce cleaner fuels that meet environmental regulations more easily.
Given these advantages, light, sweet crude oils are more sought after, leading to higher prices compared to sour or heavy crudes. This is why they typically trade at a premium.
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