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Saudi extra barrels wrong kind of crude

LONDON - The world’s oil refiners are unimpressed by Saudi Arabia’s boost to production capacity that would only swell supplies of sour, high-sulfur crude while they hanker for sweet oil.

U.S. oil prices still hovered near $50 on Wednesday, testimony to the indifference to Riyadh’s pledge to hoist official production capacity by 500,000 barrels per day (bpd) to 11 million bpd.

“Most refiners couldn’t take more sour if they tried,” said one refiner, who asked not to be named.

“We have a glut of sour crude and a short supply squeeze on low-sulfur crude oil and products, so extra Saudi makes no difference whatsoever,” a physical oil trader said.

Riyadh’s new increment, together with capacity expansions in Kuwait and Iran will add some 900,000 bpd of new sour crude capacity by year’s end.

But the kingdom has made clear it will only tap its extra reserves if warranted by customer demand. Saudi Aramco’s marketing plan for this month and next calls for production of 9.5 million bpd.

New Saudi output would come courtesy of intensified drilling in the kingdom’s oilfields, primarily new expansion projects at Abu Safah and Qatif, and yield mostly Arab Light --similar in density to North Sea Brent crude.

But analysts said it is still relatively high in sulfur and more difficult to refine into the low-sulfur products increasingly in demand for transport fuel.

“The impact on the market will be pretty negligible,” said Seth Kleinman, analyst at PFC Energy in Washington. “The world is awash with sour because there is a dearth of desulfurisation capacity.”

The surplus of heavy sour crude, which has lower yields of lighter products, but is rich in heavy products like fuel oil, has sent sour grades diving to record low differentials against light sweet marker grades that have hit record highs.

Saudi Arabia’s latest Official Selling Prices for sales of its Arabian Heavy crude into the United States have been set at $11.30 below U.S. light sweet benchmark West Texas Intermediate, a fall of $3.35 compared with the level for May.

Cleaner burning fuel
Desulfurisation capacity is being increased, but so is demand for low-sulfur products as specifications are changed across the globe to introduce cleaner burning fuels.

The new oil from Saudi Arabia’s Qatif field will be blended into Arab Light, while that from Abu Safah is Arab Medium.

Crude quality is based on density, measured by American Petroleum Institute gravity standards and the amount of sulfur it contains.

Arab Medium and Arab Light streams have respective APIs of 29-32 degrees and 32-36 degrees but relatively high sulfur contents of about 2.5 percent and 1.5 percent, respectively.

They would not make up for any major outage from Nigeria where unrest in the oil-rich Delta region is threatening to shut in production of light sweet high-quality crude.

Still light Saudi oil offers more hope than heavy sours of alleviating current high oil prices, which for light sweet benchmark Brent crude and U.S. futures have hit record highs.

“(Qatif) offers the highest near-term hope of narrowing light-heavy differentials,” Deborah White, senior economist at SG Commodities, said in a research note.

But she cautioned that the industry predicted the extra oil would not come onstream until the end of October at best, rather than the end of September, as promised by Saudi Arabia.

She also cited the impact of Hurricane Ivan this month, which led to the shutting in of between 1.5 and 2 million barrels per day of relatively sophisticated U.S. coastal refining capacity, better equipped to cope with heavier crudes.

“There is no immediate way, that we can ramp up light sweet, but what the world can do is increase desulfurisation capacity,” said PFC’s Kleinman.

Copyright 2004 Reuters Limited. All rights reserved. Republication or redistribution of Reuters content is expressly prohibited without the prior written consent of Reuters.

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