The U.S. shale oil boom is turning global crude pricing on its head with the historical notion that light grades shall be priced at a premium to heavy ones quickly disappearing, according to predictions from producer group OPEC.
The trend will have big implications for global oil flows, reducing revenues of light-oil-producing nations such as Nigeria and refiners geared toward heavy crude processing, OPEC said in a draft long-term report, a copy of which was seen by media.
Global oil prices have plunged in the past year due to a global glut, which arose from a steep increase in predominantly light U.S. oil production and a subsequent decision by OPEC to defend market share by not cutting its output. OPEC produces a third of global crude, which is a mixture of light and heavy.
“This supply glut, primarily of light sweet crudes, needs to ease sizably before the oil market steadies. Low oil prices are expected to force some of the costly light sweet crude oil to idle, but the displaced African light sweet crude is also forced to find an alternative market,” OPEC said.
This could be a challenge if oil demand growth in Asia and Europe were to stay fragile, the cartel said.
The pressure on sour crudes is not as intense due to tightness, particularly in Europe, as a result of sanctions, war, diversions and other geopolitical issues, OPEC said.
“The war in Syria and the sanctions on Iranian exports to the West have limited availability of sour crudes to Europe for almost three years, causing the value of regional sour crudes to be oddly higher or at small discounts in relation to the sweet crudes,” the report said.
It said turbulence in Iraqi production and exports from the country’s north also contributed to the tightness in sour grades, as did Russia’s decision to divert some of its exports to the Asia-Pacific at the expense of European markets.
More pressure on light sweet crudes is also coming from the fact that most new, sophisticated refining capacities around the world have been designed to process heavy crudes on expectations that light oil would remain scarce.
As a result, most refiners were unable to take advantage of cheaper-than-expected light grades due to limited light conversion refining capacity, particularly in the United States, the OPEC report said.
“It is also difficult to justify altering the configuration of deep conversion refineries after the huge investments that were put into their upgrading prior to the tight oil boom, when the sweet/sour spread was wide enough to justify building such heavy conversion units,” it said.
It added that shale gas developments in North America were poised to bring vast quantities of low-priced ethane, which will increasingly displace naphtha and gasoil from global markets.