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Want to lose money? Run Saudi and Russian crude in an oil refinery
[LONDON] Two of the world's most important grades of crude - Saudi Arabia's Arab Light and Russia's Urals - would lose oil refineries money in key processing regions, and new rules to improve the shipping industry's environmental performance are part of the reason.
In Singapore and South Korea, every type of refinery configuration would currently generate negative margins if running purely Arab Light crude, according to data from Oil Analytics Ltd, a firm that tracks activity and profitability at hundreds of the plants worldwide. Likewise, of seven refining setups in the Mediterranean, just one - hydrocracking - would generate positive returns from Urals. The picture is similar in north-west Europe.
Part of the slump has been caused by relatively high prices for the two crudes in question, giving refineries hope that margin weakness may prove temporary. But part of the downturn has also stemmed from a plunging market for high-sulphur fuel oil that normally gets consumed by ships. From next year, most of the maritime industry will have to switch to lower-sulphur alternatives, a fact that's caused prices to slump in recent weeks for the variety that vessels mostly burn today.
"We're in a bizarre position at the moment where a number of things are happening which I don't think are really sustainable," said Steve Sawyer, an analyst at Facts Global Energy. "Sour crudes including Urals - they haven't yet seemed to be reflecting the collapse of fuel oil prices."
Late last week, high-sulphur fuel oil for December was trading at a discount of almost US$30 a barrel to Brent, according to data from ICE Futures Europe. In June, the same contract was at a US$13 discount. The ship-fuel rules, known as IMO 2020 by traders, are expected to favour low-sulphur crudes, and both Urals and Arab Light have a relatively high content of the pollutant.
The Oil Analytics data on Bloomberg shows what refineries would make if processing just one grade of crude. In practice, the plants mix the barrels they process to avoid over-production of unwanted fuels. But the two grades are among the largest streams in the world, and the weak margins demonstrate just how carefully plants must manage the intake of crudes that are sour, or high in sulphur, as the new rules approach.
Russia pumps about 7.7 million barrels a day of Urals crude, most of which gets consumed domestically, according to data from Rystad Energy. Total global oil demand is about 100 million barrels a day.
The majority of the Urals that gets exported flows through the Russia's western ports for processing in Europe. Exported Urals has a density that's fairly representative of industry averages, but its sulphur content would be considered on the high side, at about 1-1.2 per cent.
Saudi Arabia's main export grade is Arab Light, at about 5.9 million barrels a day. It too has a density that's fairly typical of industry norms. Its sulphur content is almost 2 per cent, according to Rystad.
From Jan 1, ships that don't have on-board equipment to curb sulphur emissions will have to start consuming fuel with no more than 0.5 per cent of the pollutant. That's down from a ceiling of 3.5 per cent in most parts of the world today.
There has been speculation the switch could hurt those refineries that struggle to avoid making non-compliant fuels, while boosting others. It could also mean some crudes might need to sell at increased discounts to find buyers.
Some of the margin erosion is down to higher prices for the two crudes. In Europe, Russian barrels trade at differentials to the North Sea grade Brent, while Saudi Arabia sets official selling prices for its barrels at premiums or discounts to regional benchmarks.
Early last month, Saudi Arabia raised all pricing for November oil sales to Asia - shortly after a hit to production caused by attacks on its key Abqaiq oil facilities in mid September. Arab Light is at the highest for the time of year since 2013.
A global surge in freight costs also led to European traders competing for Urals, pushing up prices, according to Jan-Jacob Verschoor, an analyst at Oil Analytics. On top of that, aggregated loadings from Russia's western ports are the smallest for the time of year since at least 2012.