Brent Dips below Sour Crude as Heavy Supply Tightens

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By Irina Slav

The price of the Brent international crude oil benchmark dipped below two Middle Eastern benchmarks that represent heavier, sour grades, Reuters reports, citing industry sources.

Based on light sweet crude grades produced in the North Sea, Brent has traditionally traded at a premium to sour grades with a higher sulfur content that have been typically considered sort of lower quality than light sweet blends that yield higher amounts of fuels such as gasoline.

However, heavy crude blends are essential for the production of middle distillates used for other types of fuels, including bunkering fuel, where a seismic change is coming next year: the International Maritime Organization is implementing stricter sulfur emission rules that will require refiners to adjust their production accordingly. Still this adjustment does not meant demand for heavy crude will fall. In fact, it is expected to rise.

At the same time, OPEC is cutting the production of its heavier grades in its efforts to prop up prices. This, added to the latest round of U.S. sanctions against Venezuela’s PDVSA and Iran, has begun to tighten heavy crude supply and has become the reason for what may seem an unnatural price difference for light and heavy crude.

Yet this difference is not very high for now. According to data from S&P Global Platts, the average price for Brent crude in February stood at US$64.032 a barrel while the average for the heavier Dubai was US$64.575 a barrel and the average for the Oman benchmark was US$64.681 a barrel.

If the supply of heavy crude globally continues to tighten, the discount of Brent to heavier blends could deepen. It is still uncertain, however, if things play out this way. OPEC is meeting next month to discuss progress on its latest round of cuts but it’s anyone’s guess if these will be extended, especially with Russian oil companies and notably Rosneft not particularly happy with the new cuts.

Meanwhile, Venezuela’s president Nicolas Maduro is holding on despite mounting pressure from the United States to cede the top office in the country, so Venezuelan crude supply will likely continue to be tight for the next few months at least. Iran sanctions are also unlikely to go away anytime soon, adding to pressure on heavy crude supply.

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