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122 comments on The International Energy Assocation's Medium-Term Oil Market Report

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memmel on July 9, 2007 - 8:21pm Permalink | Subthread | Parent | Comments top

The last thread on this subject made me wonder if peak light sweet has really occurred. The increasing sour effect seems real enough but on the same hand I never got a good handle on how this would effect refining. It seemed to me that its a problem that can and is readily dealt with.

Although a lot of people seem to believe in peak light sweet it seems that in looking at the data that we really are not seeing this. What seems to be happening is that refiners have moved to more complex refining with more of the product mix going to gasoline and other lighter products on top of a general peak in oil production. So for economic reasons regions that have advanced refining capabilities may be importing heavier oils but this is not the same as peak light sweet. I saw no clear evidence for a global peak in light sweet vs general oil production.

Your post seems to point out that indeed a peak of light sweet has not happened globally.

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Gilgamesh on July 9, 2007 - 8:55pm Permalink | Subthread | Parent | Comments top

I posted this yesterday, ill post again

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This is USA FOB data from the EIA. The landed data was the same. Data is current to last month.

It shows the demand for light sweet crude by measuring the linear relationship between API gravity and price. Higher gravity means better oil(well sweeter). If the supply curve moves to the right or left(proportional changes in prices for ALL GRADES), the slope will remain unchanged, however IFF the price of the sweeter crude goes up more than the lower grades of oil... the slope goes up (blue line)

Red line is the correlation
Black line is the hypothetical cost of 0 degree API.

i used r and something like

for (i in 1:end){lintemp<-lm(price[i,]~gravity);summary(lintemp)}

and did some concating to bring it all together with a lowess smoothing of the resulting data to bring out trends.

In my opinion, light sweet crude has a strong chance of being in crisis at this moment. Using only the graph (which does not have data before 1983(eia limitations)) i can only say that the slope/correlation/hypothetical barrel have never moved this strongly together in the past 24 years)

/the coolest part of this graph is that given api gravity and price, i can guess the price of every other api barrel stream fairly closely. (esp now since the R^2 is .99something for a linear fit)

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memmel on July 9, 2007 - 9:42pm Permalink | Subthread | Parent | Comments top

But this same conclusion can be drawn if the US has moved to more advanced refineries and is taking advantage of the price differential between light sweet and the heavier sour grades to make more money on refining. I agree that the US crude supply seems to have gotten heavier and sour but this is by choice not because of a global peak in light sweet oil.

You would have to have the same information for more countries to see if peak light sweet is real. As the spread price spread between light and heavy contracts over the coming years we may well see this curve move back.

So you need to show that we have not significantly upgraded our ability to handle heavy sour oils in the US. If I understand what Robert has said correctly the fact that the opposite is true and most of the refinery upgrades over the last few years included extensive support for refining heavier sour crudes.

I think you will find if you graph the capability of our refineries you will see that the correlation is actually between refining capability and not peak light sweet.

The widening price spread between light and heavy sour oils can easily be explained by the fact that its a lot easier to get a simple refinery in operation in a region that demand is growing. Also note that the asphalt and other by products used in construction such as roofing tar are in higher demand in these same regions since road construction is also growing. So its not exactly a bad thing to practice simple refining in areas that are developing a more extensive automobile culture.

So the global price differential that resulted in a move to complex refining in the US seems to be simply the result of growing demand for the mix of products from simple refining of light sweet in the developing world.

To me its common sense that the increasing demand for oil products in the growing second and third world economies would be met with and initial expansion of simple refining capacity and thus price pressure on the lighter and sweeter grades even though the overall mix does not seemed to have changed significantly.

I know this is a bit more complex than simple peaking of light sweet but the global data seems to indicate that both types are readily available but the price spread is being caused by other factors and driving the use of complex refining in the more developed world.

In any case this is a Robert problem IMHO.

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BaSE on July 9, 2007 - 11:38pm Permalink | Subthread | Parent | Comments top

It is a surprise to me to see WTI nearly $5/barrel higher than Brent. I thought WTI was a better grade crude than Brent and has most often in the past led Brent by $2-$4. Does this mean that oil is not truly fungible? Anyway I expect WTI to catch up with Brent or Brent to fall precipitously to WTI. Are we buying Brent and hoarding WTI? What's up?

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Gilgamesh on July 10, 2007 - 10:59am Permalink | Subthread | Parent | Comments top

hmm, i'll have to punch out a histogram stacked line graph over time of how imports are divided. it could get interesting then. if we show increasing heavy crude import and increasing light prices, then the US has effectively hedged against rising oil prices!

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memmel on July 10, 2007 - 11:34am Permalink | Subthread | Parent | Comments top

Exactly !

The US by upgrading its refineries to handle "junk" oil is optimizing itself for the long term case of ever increasing oil prices. This is probably the underlying reason that WTI has become decoupled from global oil prices in the US at least the need for light sweet crude has dropped dramatically.

I'd have to guess the same is happening in Europe and Asia.
It may well buy use several years of below 100bbl oil I don't know. But maximizing the abilities of the refineries to handle any oil and optimize for any product is probably whats keeping the current situation of zero production growth from causing price spikes over 100 now.

Overall the move to complex refining can only do so much before absolute supply begins to be a issue.

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