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Higher availability of high-sulfur, or sour, crude grades globally as well as surging natural gas prices in recent months have significantly widened the discount at which sour grades trade relative to the low-sulfur crudes.
As OPEC, whose members produce mostly medium-sulfur and high-sulfur grades, is easing the production cuts, more sour crude barrels come on the market.
“Unlike the sour crude oil supply that has been increasing, supply from OPEC members that produce mostly sweet crude oils has been relatively flat,” the U.S. Energy Information Administration (EIA) said on Friday.
Sour grades need more refining and desulfurization, which uses hydrogen, which in turn is produced from natural gas.
But high natural gas prices are weighing on refiners’ decisions to process sour crudes. The processing of high-sulfur grades currently incurs more feedstock costs, so refiners who have the choice prefer sweeter crudes.
In recent months, surging natural gas prices in Europe and Asia boosted demand for oil products, benefiting oil refiners globally. Yet, it is these record natural gas prices that have started to weigh on the refining industry, which had just rebounded from several consecutive weak quarters due to the pandemic-driven slump in fuel consumption.
Apart from slowing down steel, chemicals, and fertilizer production in Europe, the high natural gas prices are significantly raising operating expenditures for refiners because natural gas is being used for hydrogen production at the hydrocracker and hydrotreater units that remove sulfur from higher-sulfur crude.
As a result, the discount of sour crudes to the sweet Brent Crude and other sweet varieties has widened.
For example, the average spot price of U.S. Mars, a sour crude, was $4.92 per barrel below the Brent Crude spot price in November, the EIA has estimated. The Mars-Brent spread in November was the highest so far this year. In January, the spread was at its lowest in 2021 at $1.47 a barrel.
By Tsvetana Paraskova for Oilprice.com
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Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews.