Heavy Crude Oversupply: Why Soaring Tanker Freight Rates Are Trapping Americas Barrels
Heavy crude oil is accumulating in North and South America because record-high tanker rates have made it too expensive to ship to the Asian and European refiners that want it. The result is an unusual divide in the global oil market: a glut in the Western Hemisphere and tight supply elsewhere, with benchmark prices holding above $100 a barrel.
Heavy crude is a denser grade that Asian, many American, and some European refineries are built to process, and it usually sells at a discount to light crude, giving refiners wider margins when freight is affordable. Scott Shelton, an energy specialist at TP ICAP, said the current imbalance comes down to shipping. Venezuela, the United States, and Canada each produce more oil than they consume and depend on Asian buyers to balance their markets, but ship prices are climbing as availability falls.
Supply Chain Disruptions Drive Heavy Crude Buildup
Supply has also grown. Venezuelan exports have surged since the U.S. captured former President Nicolas Maduro in January and began pushing to reactivate the country’s oil sector, Canadian output is at a record, and Washington has released more than 130 million barrels from its emergency reserve. Meanwhile, the cost of a supertanker from the U.S. Gulf Coast to Asia has more than quintupled since February, as ship-to-ship transfers in the Gulf of Oman tie up vessels worldwide.
Heavy Crude Prices, Tanker Costs and U.S. Refinery Capacity
The price data show how sharply the discount has widened. Argus Media reported that flagship Canadian, Colombian, and Ecuadorian heavy grades each fell more than $10 a barrel to their lowest level in six weeks. On Thursday, Western Canada Select traded near $74, Colombia’s Vasconia near $84, and Ecuador’s Oriente near $76, all excluding shipping and insurance. Two traders put Venezuelan crude at about $74.50 on the same basis. Signal Maritime analyst Georgios Sakellariou estimated that a supertanker voyage from the U.S. Gulf Coast to Europe cost about $46 million last week, or roughly $24.50 a barrel including ship-to-ship transfer and other charges, compared with about $6.5 million, or around $4 a barrel, before the Iran war began in late February. Voyages from the Americas to Asia exceeded $80 million, about $40 a barrel, against $10 million to $15 million near the start of the year.
Simple arithmetic shows why the barrels are stuck. Adding roughly $40 a barrel in freight to Western Canada Select’s $74 implies a delivered cost of about $114 a barrel in Asia, above the $100 benchmark level, although the benchmark is a different grade and the comparison is illustrative.
Domestic Demand Cannot Absorb Surplus
Domestic demand cannot absorb the surplus either. Heavy crude yields more diesel than lighter grades, and U.S. diesel prices are soaring, yet analysts and traders said Gulf Coast refiners have already bought as much as they can process. The EIA reported that U.S. refineries have averaged about 93.5% of capacity weekly this year, the highest in 28 years. Although these plants are complex and geared toward heavier crude slates, they can run heavy grades only up to a limit. Many are also configured for offshore Gulf of Mexico crude such as Mars Sour, rather than Canadian or Venezuelan oil that must be blended with lighter feedstock.
An analyst identified only as Irwin in the source material said Venezuelan and U.S. emergency barrels have already pushed cokers, the units that convert residual crude into diesel and gasoline feedstocks, close to maximum use. High freight is now a further obstacle to exporting those barrels east, he said, and is forcing storage builds of heavy sour crude across the Americas.
Original Article: Freight Costs Strand Americas’ Heavy Crude as Asian Buyers Face Shortages — Businessupturn