Production cuts drive sour crude price increases

Production cuts among OPEC+ members are limiting availability of medium and heavy sour grades of crude oil and contributing to higher relative prices for these grades, reversing typical price relationships. In early June, OPEC+ members announced they would extend their production cuts through 2024. Saudi Arabia also announced it would reduce production by an additional 1 million barrels per day (b/d) for July. The voluntary Saudi production cuts were extended several times, and Saudi Arabia announced on September 5 it would extend the additional cuts through the end of 2023. Most of Saudi Arabia’s crude oil contains more than 1% sulfur, our threshold for classifying crude oil as sour, although Arab Extra Light and Arab Super Light are considered sweet. The production cuts are having a larger impact on the price of sour crude oils, although global crude oil inventory draws are also putting upward pressure on light, sweet benchmarks such as Brent and West Texas Intermediate (WTI).

Light, sweet crude oils typically trade at a premium compared with sour crude oils because they are less costly to refine and tend to produce higher yields of more valuable products. Sweet and sour crude oil price spreads have narrowed in most major trading hubs, including those in North America, Europe, and the Middle East. The spread between the price of medium, sour Mars crude oil and the light, sweet Magellan East Houston (MEH) declined since late 2022, and Mars was sold at a small premium briefly in July (Figure 1). The price of MEH reflects the price of light, sweet crude oil at the Enterprise ECHO terminal in Houston, Texas. The spread has increased over the past few weeks, although it is still down from earlier this year.

Between July 7 and August 25, U.S. commercial crude oil stockpiles declined 8% (35.2 million barrels). Most U.S. crude oil production is light, sweet crude oil, and the price of MEH increased more than the price of Mars, widening the spread. After Saudi Arabia’s September 5 announcement to extend its production cuts through the end of 2023, the spread between MEH and Mars narrowed again to $0.61 per barrel (b) as of September 6.

Globally, sour crude oil prices are also increasing compared with other sweet benchmark crude oils. Medium, sour Dubai Fateh (an Asia/Middle East benchmark), which is similar to Saudi Arabia’s Arab Light, recently traded at a price premium to light, sweet Dated Brent, reversing the typical trend. Between June 21 and September 1, Dubai Fateh traded at an average premium of $0.62/b compared with Dated Brent, based on a five-day rolling average (Figure 2). Since September 5 (the day Saudi announced an extension to their production cuts), the price of Brent increased, and on September 6, Brent traded at a $0.44/b premium to Dubai. That compares to Dated Brent trading at an average premium of $2.56 per barrel (b) compared with Dubai Fateh between January 4, 2021, and June 20, 2023. Trade press reports similar strength in Norway’s Johan Sverdrup—a medium, sour crude oil—as refiners bid up the price amid supply constraints.

In our August Short-Term Energy Outlook, we estimate that global petroleum stocks declined by 530,000 b/d in June after building by an average of 810,000 b/d between January and May. The global stock draws in June were the result of monthly consumption growth (led by Europe and other non-OECD countries) that outpaced production growth. Beginning in July, OPEC+ production cuts contributed to global inventory draws, putting upward pressure on crude oil prices. We estimate that OPEC crude oil production declined by 650,000 b/d to 27.6 million b/d in July, the lowest production since October 2021. OPEC production cuts were led by Saudi Arabia, which cut production by 750,000 b/d to 9.3 million b/d in July, the least since June 2021. We forecast global stock draws will average 630,000 b/d in the third quarter of 2023 (3Q23) and 120,000 in 4Q23.

Following Saudi Arabia’s crude oil production cuts, its crude oil exports fell. According to data from Vortexa Analytics, Saudi Arabia exported 6.7 million b/d of crude oil and condensate in June. Exports fell 18% (1.2 million b/d) in August to 5.5 million b/d (Figure 3). Exports from Kuwait also fell over the same period. Kuwait exported 1.4 million b/d of crude and condensate in August, a 17% decrease (270,000 b/d) from exports in June.

Saudi Arabia also increased the official selling price (OSP) of Arab Light (a medium, sour crude oil) to Asia and Europe, further pushing up the price of global sour crude oil. Saudi Arabia’s OSPs to Asia and Europe are based off differentials to regional benchmark crude oils. Saudi Arabia uses Platts Dubai and DME Oman crude oil for Asia and the Intercontinental Exchange (ICE) Brent futures price for Europe. The September OSP for Arab Light to Asia increased by 30 cents/b to a $3.50/b premium, and the price to Northwest Europe increased by $2.00/b to $5.80/b premium (Figure 4). The October OSP to Asia increased to a $3.60/b premium while the OSP to Northwest Europe dropped slightly to a $5.70/b premium.

The extent and duration of the current market dynamics, with sour crude oil prices trading unusually high, remain uncertain. On the supply side, OPEC+ and Saudi Arabia’s crude oil production and OSPs will have direct impacts on the price of sour crude oil. Demand for sour crude oil may increase as new Middle East refineries come on line, providing additional support for sour crude oil prices. In Oman, the 230,000 b/d Duqm refinery (a joint venture between Oman’s OQ Group and Kuwait Petroleum International) is scheduled to be completed by the end of 2023 and its feedstock is mainly sour and heavy crude oils. Kuwait’s Al Zour refinery is currently operating at 410,000 b/d, with a target capacity of 615,000 b/d by the end of 2023. U.S. refineries may face additional competition for sour barrels if the Trans Mountain Pipeline in Canada comes online in early 2024 as planned. The Trans Mountain Pipeline will move heavy sour Western Canada Select (WCS) crude oil to the west coast of Canada and the U.S., away from U.S. refining centers.

For questions about This Week in Petroleum, contact the Petroleum and Liquid Fuels Markets Team at 202-586-5840.