capacity were the limiting factor in the market, refineries with and without
such capacity would be running extra
barrels of crude oil without benefit of conversion, thereby causing the
marginal price of heavy crude oil to
be set on the basis of a topping/reforming refinery, rather than a more
complex refinery. That did not seem to be the case in
SThe red line compares
the product values derived from refineries cracking a light crude oil
(Louisiana Light Sweet or LLS) to
product values cracked from a heavy crude oil (Mars). The difference in these product values is then compared to the actual price
difference of the two crude oils. The
similarity implies that conversion
units were not a major constraint.
–While Mars crude (25% bottoms and 2% sulfur compared to LLS at 10%
bottoms and 0.5% sulfur) is run mainly in
U.S. refineries with coking capability, its price is being set on the world
market by refineries that don’t have coking
capability, since it competes worldwide with comparable crude oils that are being processed in cracking refineries.
–The net result is that refiners having bottoms upgrading capability in
this market will make better margins than
those without, and as more refiners add coking worldwide, the narrower the
differential will grow.
SConsider the case If
world refiners had 1 million barrels per day more coking capacity (a 25%
increase) at the beginning of 2004 than
–About 10% less residual fuel oil would have been produced in the world
market, but many refiners still would be
producing 20-30% residual fuel. Lower
volumes of residual fuel would likely
improve price, but residual fuel oil prices
would still remain well below crude oil prices as this fuel competes with
other boiler fuels. And heavy crude oils would still sell at a
large discount to light crude oils.
–As crude oil prices increased, that residual fuel oil would still have
been an anchor in the short run. Light product prices would have increased the same or
even more than the $20-$25 per barrel, while residual prices would only have increased slightly. The light-heavy crude oil price differential
would have increased proportionally.
capacity limits did not seem to be a major factor in the 2004 runup, there is
no doubt that many refiners wished they had
more bottoms conversion capacity to reduce residual fuel yield in their facilities.