Excess Saudi Crude Not Selling

Jim Brown
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When Libyan crude production was halted Saudi Arabia it would produce any grade in any quantity to keep the oil market supplied. When OPEC failed to expand quotas in June Saudi and friends said they would immediately increase production by 1.5 mbpd. Neither promise has come to pass.

Saudi's offer to replace the Libyan crude failed when they could not replace the same grade of light crude that Libya produces. Saudi blended some super light Arabian with a grade of heavier sour crude in an attempt to produce a light grade in quantity but they were only able to sell two tanker loads. European refiners require light sweet crude and the sour component prevented any offers. Saudi eventually cancelled the program.

When OPEC failed to increase quotas and Saudi, Kuwait and the UAE offered to add another 1.5 mbpd to production it was Saudi who would have to do the heavy lifting. Kuwait and the UAE have very little excess capacity.

Saudi reportedly offered extra crude for July and August deliveries but all but two of their regular customers passed on the offer. Saudi normally sells its crude to a fixed number of buyers on long term contracts. One buyer in India and one in Southeast Asia agreed to accept extra barrels for August.

Since the majority of the demand growth is in Asia and Asia uses the Saudi grade of crude it would seem there is a disconnect between the "surging demand" in the press and the "actual demand" by refiners. It remains to be seen how much oil Saudi is actually producing but it appears there remains a surplus of heavy sour crude.

There is not a surplus of light sweet crude as I reported on Sunday. Goldman and Barron's both expressed alarm last week over the shrinking supplies of light crude.

This problem of demand for different oil grades is not new. I have reported on it many times. We are approaching Peak Sweet™ and there is nothing Saudi Arabia or OPEC can do about it except build their own refineries and sell the refined products instead of their excess capacity in lousy grades of oil. Saudi is actually working on that process and will have two monster refineries completed in the next 3-5 years.

To further confuse the demand issue Kuwait and Saudi Arabia both changed their prices for oil sold. Kuwait reduced its discount for Kuwait Export Crude (30.5 degree API) shipments to Asia to 60-cents below the average for Oman and Dubai crudes. That is the lowest discount since October 2009. The prior discount was 85-cents.

Saudi Arabia also raised the price for its comparable Arab Medium crude (31 degree API) to Asian refiners. Most OPEC producers sell their crude at a discount or premium to a standard benchmark grade of crude.

Saudi inexplicably cut prices for light crude to buyers in the U.S. and Asia and raised prices for its medium and heavy grades. Confused? There is a shortage of light crude so the cut the price but there is an excess of heavy crude so they raised the price? Obviously there is something we don't know and will probably never know on how these countries rationalize their sales prices.

I know the difference between 60-cents and 85-cents a barrel is not much but when you produce 10.0 mbpd that works out to $2.5 million a day. I could live on that!

Jim Brown

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