Iran has asserted that no OPEC member can take over its share of oil exports. This has created a quandary, as only OPEC producers in the Arabian Gulf have crude available with a sulfur level above 0.5 percent, matching Iran’s sour crude.
Asian refiners have always hungered for the heavier, higher sulfur crude grades, especially in the largest consuming nations of China and India. However, stronger refining margins, firm middle distillate cracks and low freight rates have all opened the appetite of Asian refineries to run light, sweet crude slates. This trend might ease the tightening oil market and uncertainties over supplies later this year.
Moreover, demand is expected to grow even higher as China starts to increase its purchases of light, sweet crude oil from West and North Africa. Last year, especially amid the OPEC+ output cuts that came along with the change in trade flows amid the shale oil revolution, refineries needed more heavy or sour crude grades. This resulted in a narrowing of light crude-heavy crude differentials.
Last month, S&P Global Platts reported that DME Oman crude settled higher than ICE Brent for the first time in over a year. Brent is a sweet crude, with a sulfur content of about 0.37 percent. Oman crude, on the other hand, is considered sour, with a sulfur content of above 1 percent.
Iranian oil exports are expected to go into a steep decline. As this happens, it could raise sour crude prices relative to sweet crudes — essentially narrowing the Brent-Dubai price spread. If the spread narrows enough, that could make refiners, particularly in Asia, consider running more sweet crudes than they usually do — keeping in mind that sweet crude is usually priced higher than sour.
Once that scenario kicks in, a whole range of replacement crudes could come into play. Among the grades likely to see a pickup in demand are West African, North Sea and the sweet US shale crudes that have recently surged into Asia and Europe. Meanwhile, if Chinese refiners suspend their imports of US crudes due to trade-related tensions, India might be ready to step in and fill the gap.
The US has emerged as a major oil exporter of ultralight, sweet crude from the shale oil industry.
US refineries are consuming, where possible, as much low-priced crude as their capacity can handle. Feedstock is becoming lighter, which is resulting in refineries producing a growing share of gasoline and light-ends, such as propane, with a fairly stagnant domestic demand.
Since 2005, US crude oil production has almost doubled. Yet, the world’s largest refining sector is almost saturated in light/sweet crude that is produced from the shale plays, at odds with the configuration of the domestic US refineries. Thus, the US has already backed away from all imports of light, sweet crude, as the downstream environment cannot accommodate more light crude without significant investment. US refiners have not added much in the way of crude distillation capacity, keeping capital expenditure limited to the smaller unsophisticated topping refineries. As a result, the bulk of incremental US crude supply will have to find a home abroad.
This will result in US refiners focusing on the export market. However, there are challenges to increasing US crude exports, including logistical hurdles and the US crude being a mismatch for the configuration of many refineries worldwide. This means it will have to be priced competitively.
US refiners have increased the volumes of domestic crude they are processing, but have not yet had to change their crude diet in terms of crude quality. Instead, the growing volumes of light crude produced in the US have displaced imports of light barrels from countries such as Nigeria and Angola. US exports are mainly of the very light, sweet shale oil. This has been evident in price action with heavier crudes, such as Urals and Angolan grades outperforming lighter grades such as Saharan and Nigerian.
Assuming condensates fall under the umbrella of sanctions, taking Iranian condensate out of the market will be a great opportunity for US producers. The US has emerged as a major oil exporter of ultralight, sweet crude from the shale oil industry. Replacing Iranian condensate will give shale producers the entrée needed to market the surge in output. US condensate is generally of better quality than Iranian condensate, with less sulfur and a yield of more than 50 percent Naphtha.
In recent years, the US has brought several new condensate splitters online. However, their processing capacity is now largely full, while US condensate production continues to rise. Of course, the opportunity to offer condensate to new markets is subject to US export facilities being able to accommodate higher oil exports above 2 million barrels per day. As the biggest market is in Asia-Pacific, China and India will likely continue their imports of Iranian crude and condensate, but other countries could come under pressure from the US to stop purchases from Iran.
- Faisal Mrza is an energy and oil market adviser. He was formerly with OPEC and Saudi Aramco. Reach him on Twitter: @faisalmrza