Heavy Sour Crude Oil: A Challenge For Refiners
Crude oil has a wide range of grades and heavy sour crude describes that with sulfur content greater than 0.5-1%, compared to the light, sweet variation (with sulfur less than 0.5%).
The significance of this higher sulfur content is that it is more difficult to refine the crude into its various distillate products, particularly the in-demand unleaded gasoline.
One of the main impurities in sour crude oil is toxic hydrogen sulfide along with other mercaptans (sulfur-containing compounds).
The major crude producers in the Middle East, Saudi Arabia, Iran, Iraq, and Kuwait, all members of OPEC, export mainly this heavy sour grade of crude.
In recent years the proportion of sour crude oil being pumped has increased.
A major problem faced by the oil markets today is that there is very little refining capacity available to process these heavy sour grades.
Different equipment and processes are needed to filter out the higher levels of sulfur from the petroleum, and major investment in refining capacity is urgently needed.
So with limited refining infrastructure to process heavy sour crude oil, these commodity markets have seen the unusual situation of tanker loads of Iranian heavy sour crude – mainly Soroosh and Norooz – anchored in the Persian Gulf with no buyer for the oil.
Refiners want the sweet light crude variety with lower costs and so better margins, for their derivatives and a growing market in unleaded gasoline.
Light sweet crude is being depleted at a much faster rate than its heavier sour cousin, and when OPEC declares that there is sufficient oil this shows the imbalance in the market.
The record surge in world crude oil prices reported in the media almost daily refers to the light, sweet West Texas Intermediate (WTI), for which there is a relative shortage.
Trading Heavy Sour Crude Oil
A cash-settled Futures contract is available for trading the benchmark Middle East Sour Crude oil on the ICE, along with contracts for ICE Brent and ICE WTI crude benchmarks.
It is clear that there is a serious supply problem when you look at the increase in the spread between light sweet and heavy sour crudes.
Just keep an eye on the official selling prices of Saudi Arabia’s Arabian Extra Light and Arabian Light and check the spreads with Arabian Medium and Arabian Heavy.
The spread was recently quoted at around $10 per barrel, which is a large difference historically.
As world leaders line up to appeal with the heads of OPEC member states for increasing production, the question will be whether this will be of the light, sweet grade, or the heavy sour grades.
It seems that unless there will be a determined drive to invest in new refining facilities which can cope with the heavy sour grade the world will simply have to adapt to the relatively high crude prices currently being experienced.
The alternative is for there to be over the longer term a significant reduction in demand caused by the introduction of alternative fuels. In the meantime, oil-producing nations will need to keep pumping out heavy sour crude oil.