Crude quality does not grab the headlines like international crude prices do, but for producers, consumers and refiners it has a significant impact on decision-making. And crude quality has been a story that has reared its head in the geekier corners of the oil industry from time to time following US shale’s meteoric rise over the last decade and the ensuing lifting of the 40-year US ban on crude exports almost nine years ago.
Crude comes in many different varieties, with the main variables being weight (light/heavy) and sulphur content (sweet/sour). The American Petroleum Institute (API) gravity is a measure of how heavy or light an oil is compared with water, with an API of between 40 and 45 generally commanding the highest prices. All crudes above about 31 are considered light and come at a premium, while those below about 22 are seen as heavy and trade at a discount.
US shale is a high-quality crude, with key grades such as Eagle Ford and WTI Cushing having an API in excess of 40. That compares with key Middle East grades such as Saudi Arabia heavy and light which, despite their names, are both medium-weighted, along with Russian Urals.
So, on the whole, US shale is an extremely valuable light crude that a lot of refiners like to snap up as it yields more higher-value oil products—such as middle distillates and gasoline—rather than fuel oil. Refiners are sophisticated and can mix and match grades to blend the products their customers want but only up to a certain point and assuming there are plenty of heavier grades to balance the mix. Otherwise, refiners can hit a wall.
Refiners also do not necessarily want to pay for light sweet crude when the economics, product yield or refinery setup are not in their interests. This is the story that lies behind the US shale production bonanza narrative: the one of the US seeking energy independence, the one around US output breaking records in excess of 13m b/d amid debate about for how long this will continue. US shale has flooded Europe, especially in the absence of Russian Urals, but there are limits to Europe’s consumption of it.
Light-headed Europe
It is sometimes argued that, once the lack of demand from refiners starts to limit the growth of US shale output, oil supply could start to struggle. A refining wall occurs when there is a mismatch between crude quality and refining capacity, and so all additional crude produced has to be exported. Eventually this feeds through to a worldwide refining wall, with plants not suited to running such a light slate.
Many analysts argue that wall has been slammed into in the US. The country was absorbing as much shale as it could well before Russia’s invasion of Ukraine, which was why inventories were going up and why the WTI oil price in the US crashed against the international Brent crude price. Europe has now been absorbing North Sea, US Gulf Coast, Nigerian and Azeri crude as well as Russia’s CPC—all light crude grades—and the refiners are running their plants as light as they can given the loss of Russia’s medium sour Urals grade from the mix.
In search of heavy barrels
“2024 is shaping up to be the year when it is heavy barrels that will be missing,” pointed out Viktor Katona, lead crude analyst at analytics firm Kpler, with a firm eye on a reduction in heavy Latin American grades.
“[Mexican state-oil company] Pemex's cancellation of exports as prompt as April is a sign that the Dos Bocas refinery will be gradually moving towards a commercial ramp-up,” Katona noted, suggesting exports of the heavy sour Maya grade will be halved to 300,000b/d relatively soon. Mexico’s Dos Bocas refinery has been behind schedule and over budget but is now close to producing plenty of diesel and gasoline, and will help wean the country off expensive imports by using more of its heavy crude grades at home.
“Then it is Venezuela, a country that is almost guaranteed not to see any sanctions relief in 2025, meaning all the Merey cargoes that have gone towards US and Indian refiners in Q1 will disappear from the radars and [state-oil company] PDVSA is back to supplying one client: China,” Katona said. OPEC+ also provides an important role as the swathes of cuts to largely medium sour barrels raised questions over a lack of medium sour barrels throughout 2022 and 2023.
But with Iraq being a serial non-complier to the OPEC+ production cuts, many analysts seem to believe it will probably have to cut from its heavier Basrah Heavy pool. Then there is Nigeria’s Dangote refinery, which has provided some outlet for US shale since its startup. However, once operations begin to ramp up, the mega-refinery will start to take more local medium sweet grades rather than the lighter shale variety.
“Dangote still buys grades that are much lighter than the nominal refinery configuration, which should prioritise medium sweets with an API of 32–34. Instead, the three WTI cargoes that Dangote bought, or the 38–39 API average of its Nigerian domestic imports, suggest that secondary refining units are still not up to speed, despite primary runs ticking higher in recent weeks,” Katona explained.
“So the final quality switch at Dangote is still ahead, [and] the quality should move from the light sweet pool that it taps into currently towards a medium sweet pool, also buying up some of the [West African] barrels from adjacent countries that fit that description,” he added.
Finally, there will be the reallocation of Canadian heavy barrels that previously were exported from the US Gulf Coast to China or India towards the TMX pipeline. A higher saturation of the US West Coast with Canadian crude would also mean the Atlantic Basin heavies will suffer. The startup of the TMX pipeline expansion this year will triple the flow of crude from Alberta to Canada’s Pacific Coast to 890,000b/d.
If the US is looking at its energy security and peering into its strategic petroleum reserves, it would do well to consider crude quality and the importance of keeping it stocked with heavier grades when its light crude stocks are plentiful. This has been a mistake it has made in the past and, it should wake up to the fact that not all crude is created equal and lighter grades do not always mean a price premium.
With the US SPR creeping higher but still at lows, it should consider heavier barrels if and when it looks to replenish. At the moment, it looks only to sulphur content, and while that factor is important, it should also place more weight on API gravity. Those concerned with energy security and the wider energy industry should never forget the quality of crude as well as its quantity.
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