EIA: Sour crude oil price up on OPEC+ production cuts

Sept. 25, 2023
Crude oil production cuts among OPEC+ members are constraining global supply of medium sour and heavy sour grades of crude oil.

Crude oil production cuts among OPEC+ members are constraining the global supply of medium sour and heavy sour grades of crude oil. These cuts are increasing prices for these grades compared with sweet crude oils, reversing typical price relationships, the US Energy Information Administration (EIA) said.

Crude oil is categorized based on its density (light, medium, or heavy) and sulfur content (sweet or sour). Typically, light sweet crude oils trade at a premium compared with any sour crude oil because sweet crude oils cost less to refine and produce higher yields of more valuable products.

However, a shift has occurred, with medium sour Dubai Fateh (an important benchmark in the Asia-Middle East region) trading at a premium compared to the light, sweet Dated Brent.

“Dated Brent traded at an average premium of $2.56/bbl compared with Dubai Fateh between Jan. 4, 2021, and June 20, 2023. However, between June 21 and Sept. 19, the roles reversed, and Dubai Fateh traded at an average premium of $0.48/bbl compared with Dated Brent. Trade press reports similar movement in the price of Norway’s Johan Sverdrup—a medium, sour crude oil—as refiners offer increased prices to attract constrained supply,” EIA said.

“In North America, the spread between the price of medium, sour Mars crude oil and the light, sweet Magellan East Houston (MEH) has declined since late 2022, and Mars sold at a small premium briefly in July 2023. The price of MEH reflects the price of light sweet crude oil at the Enterprise ECHO terminal in Houston, Texas. The spread between Mars and MEH has increased over the past few weeks, although it is still lower than earlier this year.”

In June 2023, OPEC+ members said they would extend crude oil production cuts through 2024, limiting global crude oil supplies, particularly sour crude oils. On top of the OPEC+ production cuts, Saudi Arabia said it would reduce crude oil production by an additional 1 million b/d for July. These additional voluntary production cuts were extended several times, and Saudi Arabia said on Sept. 5 that it would extend the cuts through end-2023. In EIA's September Short-Term Energy Outlook, it estimates that OPEC crude oil production averaged 27.0 million b/d in August, the lowest since August 2021, and crude oil production in Saudi Arabia averaged 8.7 million b/d, the lowest since May 2021.

“Most of Saudi Arabia’s crude oil contains more than 1% sulfur, our threshold for classifying crude oil as sour, and production cuts have put more upward price pressure on sour barrels than sweet. Saudi Arabia also increased the official selling price (OSP) of Arab Light (a medium sour crude oil) to Asia and Europe, further pushing up sour crude oil prices. As a result, sweet and sour crude oil price spreads have narrowed in most major trading hubs, including those in North America, Europe, and the Middle East,” EIA said.

According to EIA, the extent and duration of the current market dynamics, with sour crude oil prices trading unusually high, remain uncertain against a backdrop of production cuts, higher OSPs, and heightened demand for sour crude oil as several new Middle East refineries come online.