Release date: August 23, 2017 | Next release date: August 30, 2017
Changing crude quality mix is affecting crude price differentials and refining decisions
Growth in liquid fuels supply since March has been driven by increases in the production of light crude oils, which have more than offset recent declines in the production of medium and heavy crudes. The divergent trends in light and medium/heavy crude production are reflected in narrowing price differences between crude oil qualities and costs across simple and complex refineries.
Voluntary production cuts from some Organization of the Petroleum Exporting Countries (OPEC) members since November 2016 have reduced the supply of medium and heavy quality crude oil to the world market. In addition, crude oil production outages in Canada and declines in production from Mexico and Venezuela are further reducing the total amount of medium and heavy crude oil available to refiners (Figure 1), although more gradually than OPEC production cuts. In contrast, the two OPEC members exempt from limiting production, Libya and Nigeria, have increased production of their light-sweet crude oil in recent months, although Nigeria’s production remains below its January 2016 level. In addition, much of the increase in U.S. production has come from shale formations in the Lower 48 states, which is primarily light crude oil.
As the relative availability of light and heavy crude oils has changed, price spreads between light and heavy crude oils have narrowed. On the U.S. Gulf Coast, the premium for Light Louisiana Sweet (LLS) over heavy Maya crude oil from Mexico narrowed from $9 per barrel (b) in March to $5/b in July. In the Midwest, the premium of light crude West Texas Intermediate (WTI) over heavy Western Canada Select (WCS) also narrowed from $13/b in March to $10/b in July (Figure 2).
Two of the most important attributes when comparing the prices of different crude oils are sulfur content and density. Density is measured in API gravity, an inverse measure of the petroleum liquid’s density compared to water. EIA defines sweet crude oil as crude that contains less than 1% sulfur and sour crude as greater than 1% sulfur. API gravity ranges from heavy, or high density (less than 25 degrees API), to light, or low density (greater than 35 degrees API) (Figure 3).
Refining involves modifying the molecular structure of hydrocarbon chains that make up crude oil and converting them into a slate of more highly valued petroleum products. With fewer long-chain hydrocarbons, light crude oils require less refinery processing to produce high-value products such as gasoline and diesel, and therefore tend to be more desirable. Heavy crude oil contains more long-chain hydrocarbons compared to light crude oil, making them more costly to process. Historically, lighter crudes have commanded a premium to heavier crudes because they incur fewer operating expenses and not all refiners have the equipment necessary to process heavy crudes.
Differences in sulfur content also affect the price of crude oil and where it is processed. Sour crude oil requires more complex refinery processing in order to remove the excess sulfur to meet low-sulfur fuel specifications and to avoid damage to refinery units. The differences in characteristics between crude oil types contribute to a general price premium of lighter and sweeter crude oils over heavier and sourer ones.
Processing heavy-sour crude oil requires additional refinery units, including crackers, cokers, and hydrotreaters, in order to yield light products. These additional units give the refiner more flexibility to select what type of crude oils to purchase and run through their refinery. The more capacity a refinery has to breakown cheaper, heavy crude oil, the more complex it is, the greater the light-product yield, and the more profitable it can be after investments in these units.
Refiners’ investment decisions often depend on the location of the refinery because of the cost of transporting oil. Gulf Coast refineries in the United States are typically supplied by heavy Mexican and South American crude oil and are more complex than East Coast refineries, which are supplied with lighter, sweeter Atlantic Basin crude oils. Since the price of crude oil and refinery complexity are major factors that affect profitability, a wider price differential between heavy and medium crude to light crude oils benefits more complex refineries. In 2017, the price differential between medium/heavy crude oil and light crude oil has gotten smaller, reducing some of the more complex refineries’ competitive advantage.
U.S. average regular gasoline and diesel retail prices fall
The U.S. average regular gasoline retail price fell 2 cents from the previous week to $2.36 per gallon on August 21, up 17 cents from the same time last year. The Midwest price fell five cents to $2.25 per gallon, the Gulf Coast price fell three cents to $2.12 per gallon, and the East Coast price fell over two cents to $2.30 per gallon. The Rocky Mountain price increased nearly three cents to $2.45 per gallon, and the West Coast price increased two cents to $2.89 per gallon.
The U.S. average diesel fuel price fell less than 1 cent, remaining at $2.60 per gallon on August 21, 23 cents higher than a year ago. The East Coast, Midwest, and Gulf Coast prices each fell less than one cent, remaining at $2.62 per gallon, $2.57 per gallon, and $2.41 per gallon, respectively. The Rocky Mountain price increased one cent to $2.71 per gallon, and the West Coast price increased less than one cent, remaining at $2.88 per gallon.
Propane inventories gain
U.S. propane stocks increased by 2.9 million barrels last week to 72.2 million barrels as of August 18, 2017, 24.0 million barrels (24.9%) lower than a year ago. Gulf Coast, Midwest, Rocky Mountain/West Coast, and East Coast inventories increased by 2.1 million barrels, 0.5 million barrels, 0.2 million barrels, and 0.1 million barrels, respectively. Propylene non-fuel-use inventories represented 3.9% of total propane inventories.
For questions about This Week in Petroleum, contact the Petroleum Markets Team at 202-586-4522.
Retail prices (dollars per gallon)
| Retail prices | Change from last | ||
|---|---|---|---|
| 08/21/17 | Week | Year | |
| Gasoline | 2.360 | -0.024 | 0.167 |
| Diesel | 2.596 | -0.002 | 0.226 |
Futures prices (dollars per gallon*)
| Futures prices | Change from last | ||
|---|---|---|---|
| 08/18/17 | Week | Year | |
| Crude oil | 48.51 | -0.31 | -0.01 |
| Gasoline | 1.624 | 0.011 | 0.111 |
| Heating oil | 1.620 | -0.015 | 0.100 |
| *Note: Crude oil price in dollars per barrel. | |||
Stocks (million barrels)
| Stocks | Change from last | ||
|---|---|---|---|
| 08/18/17 | Week | Year | |
| Crude oil | 463.2 | -3.3 | -29.8 |
| Gasoline | 229.9 | -1.2 | -2.8 |
| Distillate | 148.4 | 0.0 | -4.8 |
| Propane | 72.173 | 2.934 | -23.962 |