Viewpoint: Medium sour crude supply to tighten in 2024

Medium sour crude supply is set to tighten in 2024, as Opec+ deepens output cuts and refinery expansions in the Mideast Gulf could increase domestic consumption of these grades.

The tighter exports could fundamentally change the price differential structure between light and medium sour crudes in 2024.

State-controlled refiners in the Mideast Gulf are close to completing refinery projects that could lift their requirements for medium sour crude. Supplies of medium sour Oman crude could be reduced once Oman's 230,000 b/d Duqm refinery starts to operate at its full capacity. The refinery, a joint venture with Kuwait's state-owned KPI, will comprise feedstock consisting of 65pc Kuwaiti and 35pc Omani crude once it is fully operational.

At Abu Dhabi's 817,000 b/d Ruwais refinery complex, the completion of its crude flexibility project (CFP) would increase the volume of light sour Murban available for export by 173,000-200,000 b/d from March, pushing Murban exports above 1.6mn b/d. The CFP enables the complex to refine heavier grades such as medium sour Upper Zakum instead of almost exclusively processing Murban, allowing Adnoc to export more Murban which has historically been sold at higher premiums.

But supplies of medium and heavier sour crude have already fallen over the past year because of Opec+ output cuts. This includes reduced availabilities of medium sour Russian Urals crude, as medium and heavy grades are typically the first to get cut.

Opec+ producers have also pledged to continue to reduce production into the first quarter of 2024. If Adnoc sharply boosts the amount of Upper Zakum it processes at the Ruwais refinery after the CFP is completed, it will push out more light sour Murban, adding to an expected rise in availabilities of light US WTI crude as the US expands production.

Price implications

The trade cycle for January 2024-loading cargoes provided some indication of the price implications of increased light sour supplies and lower medium sour exports.

Spot Upper Zakum — which usually trades at a discount to Murban — averaged a 13¢/bl premium instead during the trade cycle for January 2024-loading cargoes. This marked the highest price differential on record. Murban regained its premium to medium sour grades such as Upper Zakum, Oman and Dubai for February-loading cargoes, partly as a longer-than-expected maintenance at Oman's 198,000 b/d Sohar refinery in December 2023 prompted the sale of 3mn bl of prompt Oman crude. But it is unclear how the light-medium crude price spread will fare further out next year.

The effects of an expected rise in light Murban exports were also evident in the Dubai partials mechanism in price reporting agency Platts' market-on-close window, which Platts uses to set its daily Dubai price assessments. Under the mechanism, a firm that sells 20 Dubai partial cargoes — which are 25,000 bl each — to the same buyer in the same month must deliver a full 500,000 bl crude cargo of either of the five grades — Dubai, Oman, Al-Shaheen, Upper Zakum or Murban. Upper Zakum has traditionally been the most common grade delivered as it is often the lowest priced for sellers to procure, and Murban was the opposite as it is the only light sour crude of the five deliverable grades. But no Upper Zakum cargoes were delivered in the trade cycle for January-loading cargoes that traded back in November, while eight of the 10 cargoes delivered were Murban.

Mideast Gulf producers can be seentesting the waters of this fundamental change in pricing. Abu Dhabi's state-controlled Adnoc raised its official formula price for January-loading Upper Zakum to a premium against Murban for the first time, setting Upper Zakum at a 50¢/bl premium above Murban. QatarEnergy also priced its medium sour Qatar Marine above its light sour Qatar Land for January.

How the light-medium crude spread will look in 2024 will depend on how long Opec+ members extend production cuts, but could also hinge on how Adnoc adjusts its crude slate for its Ruwais refinery, given its ability to switch crude grades. Asian refiners have largely shrugged off supply concerns because of the prospect of readily available alternatives from South America, such as Brazil. The temporary lifting of US sanctions on Venezuela's oil sector in October made it possible for more refiners to turn to Venezuelan supplies. It was possible to blend Venezuela's heavy sour Merey 16 crude with lighter crudes to achieve their desired medium sour crude slate, some refiners said.

By YouLiang Chay

Medium-light Sour Differential (Month average) ($/bl)