Shale, ships make heavy sweet oil a star

Shifting values indicate powerful forces pulling apart oil price relationships

There’s a rising star in the oil world, and it’s heavy and sweet. Dense, low-sulphur oil, known in industry parlance as heavy sweet crude, is fetching increasingly stronger prices relative to benchmark lighter grades. For example, Angola’s Dalia traded at just 10 cents below Brent oil last month, up from a discount of $4.50 (Dh16.5) in January 2016, said S&P Global Platts. Australian Pyrenees traded at $4 more than Brent, its widest premium in more than three years, as per trading sources.

The shifting values are indicative of powerful forces pulling apart long-held relationships between oil prices worldwide, in particular the US shale boom and an overhaul of marine fuel regulations.

Heavy sweet crude has come into favour because it yields a lot of diesel and lowsulphur fuel oil when it’s refined. Those fuels are seen coming into heavy demand as new rules due to take effect in 2020 mean ships will use them more as an alternative to high-sulphur fuel oil, which is produced readily from sour crude. What’s more, lighter prices are under pressure because of a glut of US shale oil and the gasoline it yields in abundance.

“What’s really in the sweet spot are heavy sweet crudes, which is offshore Angola and Brazil,” Martijn Rats, an analyst with Morgan Stanley, said in an interview. Only about 500,000 barrels a day of heavy sweet oil are exported globally, accounting for just 1 per cent of total seaborne trade.

Profits diverge

Most growth in crude production in recent years has come in the form of light shale oil in the US, while heavier exports from Iran and Venezuela are in decline because of sanctions and political disarray. That’s sent stockpiles of gasoline in the US to a record seasonal high.

Meanwhile, International Maritime Organisation rules set to go into effect in 2020 will limit the amount of sulphur in marine residual fuel. So many of the world’s more basic refineries will choose to run low-sulphur oil.