| DUBAI, April 4
DUBAI, April 4 Despite OPEC's oil output curbs,
Saudi Arabia has been offering its customers more light crudes
while cutting heavy grades, a trend that could increase as the
kingdom wants to maximise revenue and needs more heavy oil to
power its own refineries.
This trend, if sustained, will impact refining margins
particularly in Asia, and narrow the spread between light and
heavy crude globally, industry sources and analysts said.
That would be bad news for sophisticated refiners, which
value heavy grades because the lower cost of such oil results in
higher margins, and good news for older, simpler plants that
generally need light, sweet crude.
Saudi Arabia cut the April prices of light crude it sells to
Asia for the first time in three months in an effort to shore up
demand. The spread between Arab Light and Heavy was at $2.45 a
barrel, the narrowest since September.
Before the OPEC output pact, in mid-November 2016, Brent
futures for delivery in June 2017 were trading at a
premium of around $4 per barrel over Oman futures. That
has since narrowed to around $1.25.
The Organization of the Petroleum Exporting Countries,
Russia and a number of other producers pledged to cut output by
about 1.8 million barrels per day (bpd) from Jan. 1, the first
curb in eight years, to boost prices and erode a glut.
OPEC is discussing whether to extend the pact beyond June.
Saudi Arabia, the world's top oil exporter, accounts for
some 40 percent of the pledged OPEC curbs and has reduced output
by more than 500,000 bpd to slightly below 10 million bpd, with
cuts concentrated mainly in medium and heavy grades.
Those cuts, and increasing output of U.S. shale oil, have
increased the price of Middle Eastern heavy crudes for Asian
delivery, making it economical for traders to ship crude from
Russia, the Atlantic Basin and the United States to Asia.
Most of the heavier Saudi grades comes from offshore fields
- mainly Safaniya, Manifa and Zuluf, which makes production
costly compared to other Middle Eastern producers such as Iran
and Iraq, industry sources said.
"You have to meet local demand first, and domestic
refineries in Saudi Arabia need the heavy grades," one industry
"To sell the heavy grades at a competitive price against
other producers, you would be producing at higher cost but
selling at low profit."
Saudi Arabia produces a range of crudes ranging from Arab
Extra Light to Arab Heavy. It has nine refineries with
processing capacity of about 2.9 million bpd, of which just
above 1 million bpd of refining power runs on medium and heavy
"Strategically, if they have to cut back a little they would
prefer to cut back the expensive offshore production and sustain
the lighter crudes," said Sadad al-Husseini, an energy
consultant and former senior executive at state oil giant Saudi
Light, sweet crudes are more valuable to refiners because
they are easier to process, while heavier and sour grades often
trade at a discount.
SUMMER SAPS SAUDI SHIPMENTS
Saudi Arabia burns more crude in summer for power
generation, on average using 700,000 bpd for electricity to keep
the population cool in the hottest months from May to August.
It is set to burn less crude this summer as the kingdom
raises energy prices and uses more natural gas in power
stations, industry sources said, but higher domestic demand for
oil should still weigh on exports.
While exports of lighter grades to Europe should rise in the
summer to meet higher demand for transportation fuels, demand
for heavier grades in Saudi Arabia is not expected to change
much, industry sources say.
"If Saudi Arabia keeps production at 10 million bpd through
summer, domestic crude burning will be less - but it will
remain. That would mean fewer exports," another industry source
Husseini said Saudi Arabia would probably burn condensate,
light crudes or even diesel for electricity generation rather
than medium or heavy crude, which can damage power plants.
In general, lower exports of medium and heavy crudes can be
attributed to either less production of those grades or more
domestic demand, Saudi-based industry sources said.
The sources said one reason for exporting more light oil in
recent months was also related to a shortage of heavier crudes
in Saudi Arabia.
"Saudi deliberately cut its crude production in 1999, 2002
and 2009. In each of these three episodes, the share of light
crude production has increased at the expense of medium grade
output," analysts at Bank of America Merrill Lynch wrote in a
note in January.
"The historical pattern to sell more profitable (light)
grades should be no different or even more pronounced this time
around as the kingdom needs to maximize its revenues in this low
The price discount of Arab Heavy to Arab Light has narrowed
in the past few weeks and this trend should persist for the next
few months at least, the bank's analysts said.
(Reporting by Rania El Gamal; Editing by Dale Hudson)