First Published: 2004-09-29

Oil shortage or surplus? Ask shortage of what oil?

Many refineries are not set up to process abundant heavy crude oil because it is more difficult, expensive to refine into products.


Middle East Online

By Perrine Faye - LONDON

Sweet light crude urgnetly needed

OPEC producers insist there is no shortage of oil despite record prices and although plenty of heavy crude is available, refineries are thirsty for light sweet crude which is in shorter supply, analysts say.

"To answer the question, is there a shortage of oil at the moment? We have to ask, a shortage of what oil?" said Bruce Evers, an oil industry analyst at Investec Securities.

Many heavyweight producers such as Saudi Arabia, Venezuela, Kuwait and Iran produce large quantities of heavy, sour crude with a high sulphur content.

Others such as Nigeria, the United Arab Emirates, Angola and Libya pump a higher quality, light sweet crude, with a lower sulphur content.

"We still have a deficit of refinery capacity that's capable of processing heavy sour crude and we still have an absolute shortage in light sweet crude which is easy to refine," said Societe Generale analyst Deborah White.

Light, sweet, low-sulphur crude is most suitable for refining into petrol, gasoil and heating oil.

Meanwhile supply of heavy, sulphur-rich crude is currently in surplus, according to analysts.

But many refineries are not set up to process such crude because it is more difficult and expensive to refine into products.

Both the London and New York oil prices - the two international benchmarks - are for light crudes.

Prices on both markets have reached record high levels this week, smashing through the 50-dollar barrier in New York.

Yet members of the Organization of Petroleum Exporting Countries continue to insist there is no shortage of oil.

"We are increasing our capacity further to make sure it remains above two million barrels," Adel al-Jubeir, an adviser to the Saudi crown prince, said Tuesday.

"But in terms of the physical supply of crude oil, we don't see a shortage," he told CNBC.

"Every customer who wants to purchase oil from Saudi Arabia certainly can purchase that oil even if we have to increase our production. We have not seen an increase in the desire to buy more crude from Saudi Arabia over the past two months."

Analysts say this is largely because Saudi Arabia produces large amounts of heavy crude and that refiners do not need more of this.

The kingdom says the bulk of the additional 1.5 million barrels a day of supply capacity announced Tuesday from fields which recently came on stream in the Eastern Province will be of the Arabian Light Crude.

This type of oil is light, but it is also sour, or rich in sulphur.

"Most of the extra production coming from Saudi Arabia is heavy high-sulphur crude which refineries just do not want because it is more expensive to process," said Evers.

"They (the Saudis) have been offering huge price discounts in the States for their heavy crude, but people have not been buying it. It is much more difficult to turn heavy crude into gasoline than light sweet."

Recent hurricanes in the Gulf of Mexico caused shutdowns of sophisticated US refineries set up to handle heavy crude from Venezuela.

And one of the reasons why markets have reacted so nervously to unrest in Nigeria is because the African country is a major supplier to the United States of light, low-sulphur crude.

But it is not just the United States that is thirsty for such crude.

Societe Generale estimates that half of the oil processed by European refineries is light crude, such as oil from the North Sea, where fields are now maturing.

In China 80 percent of oil processed by refineries is light crude, compared with 34 percent in the United States.


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