Heavy Oil Crunch Could Drive Up Shipping and Construction Costs

A limited supply of heavy crude is pushing up heavy crude oil prices and refining costs globally, which could raise costs for shipping and road construction this summer, analysts told Reuters.

Recent export cuts from Mexico and the imminent start-up of the expanded Trans Mountain Pipeline in Canada – pushing more of Canada’s heavy crude to the Pacific instead of the Atlantic basin – are adding to existing supply tightness in the global heavy crude market.    

The crude supply cuts from the OPEC+ group are limiting heavier grades while non-OPEC production while growing, is mostly of the lighter and sweeter variety.

In addition, some Middle Eastern producers are diverting heavier crude to their domestic refineries and cutting exports of fuel oil to stock up for power generation during the summer months.

As a result, prices of heavy crude are rallying, from the U.S. Gulf Coast to the Argus Brent Sour (ABS) index, the price marker for sour crude in Europe.

The ABS index - which includes the Johan Sverdrup grade pumped at the same-name giant oilfield offshore Norway – reached its highest level in 14 months in the middle of April, per data from price agency Argus Media cited by Reuters. The index is still trading in line with Dated Brent, the light-sweet benchmark.

Mexico has reversed plans for export cuts, easing some of the upward pressure. But the heavy crude market remains tight as Canada is set to ship more crude to the Pacific coast with the Trans Mountain pipeline, while the United Arab Emirates (UAE) is sending medium sour grade Upper Zakum for processing at a local refinery, releasing more volumes of the sweeter, lighter, and more expensive, Murban crude for exports.

The share of heavy crude loadings in the global market fell from 15.5% last October to 13.9% in March this year, the lowest since at least 2016, Xavier Tang, market analyst at Vortexa, wrote in an analysis last week.

“The supply landscape has shifted towards lighter grades as US producers have been increasing output amidst cutback of heavy-sour barrels from OPEC+ producers,” Tang said, adding that “the combination of tighter heavy crude and fuel oil supplies, as well as seasonal rise in power generation demand is expected to push up fuel oil cracks in the weeks ahead.”  

By Tsvetana Paraskova for Oilprice.com

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