|SRecall that the light-heavy price difference is what
affects return on bottoms upgrading investments.
|SThe light-heavy crude oil price difference is shown on this
graph along with the light-heavy product price difference. Since the relative value of crude oil
depends on the value of the barrel of products that are refined from the
crude, it follows that the light-heavy crude oil price differential is
related to the relative value of the product barrel that is made from the
heavy crude versus the light crude barrel.
With the crude oil price declined in 2008, residual fuel became more
competitive and the light-heavy product price difference fell. But this was not the only factor working to
collapse the price difference.
|SAvailable conversion capacity relative to demand has also
narrowed light-heavy price differences.
The fall in demand and the associated reduction in refinery inputs (7
percent in Europe and 4 percent in the U.S.) reduced the pressure on
downstream conversion units. This means that the heavy crude oil marginal
barrel may have shifted to refineries that can get more value from heavy
|Typically we see the marginal barrel of heavy crude oil
being run in a non-coking cracking refinery.
These refineries cannot upgrade the residual fuel oil, so the product
value they can achieve from the heavy crude oil less than what a coking
refinery can achieve.
|Thus, when non-coking refineries are the marginal price
setters, they would set the heavy crude value less than would a coking
|More complex coking refineries may now be running the
marginal heavy crude barrels. Their ability to get more value from the heavy
crude oil tends to increase the heavy crude oil value relative to lighter
|SReduced supply of heavy crude is also likely narrowing the
price spread. Heavy crude oil
production was down in Mexico, Venezuela, and the Middle East, which made
discretionary production cuts as prices fell.
When Western Hemisphere crudes had to go in search of markets beyond
the U.S., their relative prices were lower.
In the current market, U.S. refiners dont have enough Western
Hemisphere heavy crude oils, and the refiners are going in search of heavy
feedstocks elsewhere a situation that increases the attractiveness of heavy
crudes relative to higher quality crude oils, decreasing the light-heavy