Saudi Arabia and its fellow OPEC+ producers may not have lifted the international crude oil futures with their production cuts, but the reduced supply from the world’s top crude exporter has sent the prices of sour crudes rallying in recent weeks.
In early June, the OPEC+ producers decided to keep the current cuts until the end of 2024, while OPEC’s top producer, Saudi Arabia, said it would voluntarily reduce its production by 1 million bpd in July to around 9 million bpd. Last week, Saudi Arabia said it would extend its unilateral 1 million bpd production cut into August and raised the prices of some of its grades – all of which are sour – for loading for Asia in August.
The cuts from Saudi Arabia and other Middle Eastern producers, which began in May, have already had an outsized impact on the medium-sour and heavy supply, and prices are rallying. In contrast, the availability of lighter crude, such as Brent and other grades underpinning the Brent benchmark, has been higher. In other words, the physical tightness in sour crude grades hasn’t been reflected in the international Brent Crude benchmark, which – despite all the cuts from OPEC+ and Saudi Arabia – has failed to move above $80 per barrel so far.
With a lower supply of Saudi and other Middle Eastern sour crudes, buyers are looking for alternatives in other parts of the world, driving up sour crude prices.
For example, U.S., Canadian, and North Sea sour grades have seen prices rallying. The U.S. Mars sour crude traded at the end of last week at a $2 per barrel premium to U.S. crude futures at the Cushing hub—the highest Mars premium in three years, per Reuters estimates. Mars is also trading at a premium to WTI Midland, a light sweet crude, in a rare pricing reversal.
In Canada, the heavy Western Canada Select (WCS) from Alberta has narrowed the discount to the WTI benchmark to $10 per barrel, the narrowest discount since Alberta mandated production cuts in 2019.
In Norway, the medium sour Johan Sverdrup crude from the massive oilfield of the same name traded on Friday at a record-high premium over Dated Brent, at $3.50 per barrel. The Saudi price hike and the reduced supply of Saudi crudes have sent Johan Sverdrup prices rallying, traders told Bloomberg. Johan Sverdrup typically trades at a discount to Dated Brent due to the higher sulfur content of the Norwegian grade. Six months ago, Johan Sverdrup traded at a $6 per barrel discount to Dated Brent.
By Tsvetana Paraskova for Oilprice.com
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