Since OPEC and its partners began cutting supplies at the beginning of the year, the reductions have been focused on heavier grades, sources have said, in an effort to minimize the impact on higher-value crudes. This has resulted in narrower spreads between light and heavy crudes globally: in mid-Nov. of last year, Brent futures for June 2017 delivery were trading at roughly a $4.00/bbl premium to Oman futures, but the spread has since narrowed to about $1.25/bbl.
But the effort to maintain high sales volumes of the light crudes has come at a cost: Saudi Arabia has cut its Official Selling Price for Arab Light for April for the first time in three months, reducing the spread between Arab Light and Arab Heavy to $2.45/bbl. The Saudis may have little choice about prioritizing sales of light crudes, however: industry sources say that the country's heavy grades come mainly from offshore fields, such as Manifa, Zuluf, and Safaniya, where operating costs are significantly higher than light production on solid ground. Moreover, a significant amount of refining capacity in Saudi Arabia itself—about 1.0MM b/d out of a total of about 2.9MM b/d—is designed to process those heavy grades. Both of those factors mean it is unlikely to make sense for the Kingdom to adjust its output to protect light crude premiums. "You have to meet local demand first, and domestic refineries in Saudi Arabia need the heavy grades," said one industry source. "To sell the heavy grades at a competitive price against other producers, you would be producing at higher cost but selling at low profit."
Come summer, however, direct crude burning for power generation will be stepped up. According to Sudad al-Husseini, an energy consultant and former senior executive at Saudi Aramco, that will mean lower exports of lighter grades if production is kept steady. Medium and heavy crudes, he explained, can damage power plants, making light crude, condensate or even diesel preferable fuels despite their higher costs.
In related news, Saudi Aramco has announced that it will make changes to the way it handles crude in Europe, a response to refiners who have complained that the current system—which uses the daily weighted average of Brent trades—limits their ability to hedge. In a letter to customers, Aramco said that crude sold to buyers in Europe, Africa and South America will from July 1 use the ICE Brent settlement for the benchmark instead. This "is expected to provide substantive benefits, including allowing our customers to closely hedge crude purchases." The old weighted average system, refiners had said, required them to buy and sell several times a day in order to effective hedge exposure to the benchmark. (April 4)
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