AS the crude markets crossed the psychological barrier of $50 a barrel, Saudi Arabia announced enhancing its output to roughly around 11 million barrels a day — within the next few weeks rather than months. The extra output would add 1.5 million barrels to the Kingdom’s present production.
In order to achieve the production objective, Oil and Mineral Resources Minister Ali Al-Naimi announced last week to bring the Qatif and Abu Safah oilfields on stream ahead of schedule. The Qatif field was originally scheduled to be on stream earliest by late October.
However, despite the announcement, markets appeared skeptic and unimpressed by the move. The bull run continued in the market. There was no dearth of skeptics in the market who kept saying, it was not the issue of additional crude into the market; the real issue affecting the markets was the quality of crude to be made available to the refiners. The logic indeed has some weight.
When despite the surging crude prices OPEC members said there was no shortage of oil in the market, it definitely had a point. However, market analysts having conceded the point, pointed out that the refineries are thirsty for light sweet crude, and not the heavy type being made available.
Many heavyweight producers including Saudi Arabia are producing significant quantities of heavy, sour crude, with high sulfur content. Hence market watchers claim there is an absolute shortage of light, sweet crude shortage in the market.
This light, sweet, low sulfur crude is most suitable for refining crude into petrol, gas oil and heating oil. With winter round the corner refiners tend to cater for the need for heating oil in the Northern Hemisphere. The light grades are easy to process in the refineries and most refiners have the capability to handle it, whereas there is a deficit of refining capacity that could process heavy sour crude.
The additional Saudi output would come from the new expansion projects at Abu Safah and Qatif, and would mostly yield Arab Light — similar in density to North Sea Brent crude.
But analysts said it is still relatively high in sulfur and more difficult to refine into the low-sulfur products increasingly in demand, as per the changing regulations, for transport fuel. The new oil from Saudi Arabia’s Qatif field will be blended into Arab Light, while that from Abu Safah is Arab Medium.
Crude quality is based on density, measured by American Petroleum Institute gravity standards and the amount of sulfur it contains.
Some analysts told the media the additional produce from Qatif and Abu Safah fields would not make up for any major outage from Nigeria where unrest in the oil-rich Delta region is threatening to shut in production of light sweet high-quality crude.
Still, they concede, light Saudi oil offers more hope of alleviating current high oil prices, which for light sweet benchmark Brent crude and US futures have hit record highs.
Refiners thus tend to avoid the heavy, sour crude. Further, the recent hurricanes in the Gulf of Mexico caused shutdowns of sophisticated US refineries set up to handle heavy crude from Venezuela. This development worsened the situation further, adding to the woes of the market.