You’ve probably been hearing various stories the last few weeks, like Saudi Arabia agreeing to “increase production by 300,000 barrels per day. What you’re not reading, however, is what type of crude oil this increase in production will be producing. These two stories should help you start to understand a bit more about how all this refining/crude production stuff actually works.

This first article helps explain. I just cut out the section headers to keep the quote short, but they make it fairly clear. Read the full article to get a better sense of how the global refining vs crude supply market really works, it’s interesting.

As medium sweet crude oil blends have strengthened in recent months, medium and heavier sour blends have fallen behind. In particular, Middle East heavy crudes have been unable to keep up with the growing appetite for low sulphur middle distillate products, with differentials between Saudi Super Light and Saudi Heavy crude blends widening to record levels.
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Medium sweet crudes are becoming a preferred blend
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Global refining bottlenecks are at the heart of the problem
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Middle distillate demand is pulling up medium sweet crudes
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Sulphur content in crude is again more important than gravity
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Due to refining constraints, heavier crudes are falling behind
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Despite strong demand, the global refining sector is disjointed
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Only diesel, jet are helping refining margins thus pushing up medium sweets
Thus, only diesel and jet fuel are really helping keep refining margins above water. The inability of refiners to turn more gasoline, naphtha or residual fuel oil into jet and diesel has now pushed the gasoil to fuel oil spread to record levels. Merrill Lynch said this spread is unlikely to contract much until a substantial amount of new cracking and coking capacity comes on line in 2009-2010. In turn, this situation will likely continue to provide support to medium sweet grades around the world in detriment of heavier, sourer grades.
Heavy crude can’t keep up, Business Intelligence – Middle East, 08-05-2008

These heavier, sour grades, are in fact the “excess capacity” Saudi Arabia keeps talking about. And you can rest assured that when more of this sour heavy crude hits the market, the market will not be able to absorb it, then Saudi Arabia will be able to say that it was not a supply problem, but some non-geological problem, like declining value of US dollar, speculating, etc.

You may also have heard that Iran is currently unable to sell all its crude oil. How can this be when the world is supposedly peaked, and demand is exceeding supply? Read on to learn more.

U.S. crude jumped to a record near $127 a barrel on Tuesday after Iran’s President Ahmadinejad was quoted as saying Tehran was studying a plan to cut output.

Some traders leapt to the conclusion Ahmadinejad was pursuing his dispute with the United States, which has taken issue with the country’s nuclear programme.

But Iranian oil ministry officials and customers said Iran is only reviewing its output because stocks have swollen.

Refiners are refusing to pay up for heavy Iranian crude that is difficult to convert into transport fuels and Iran is refusing to cut prices further.

“This is about the price and quality of the oil,” said one buyer of Iranian crude. “This crude is a nightmare for refiners. There is a price for everything and if they want to get rid of the stuff they will have to stomach selling at a lower price.”
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Iran has leased a fleet of giant crude vessels to sit offshore holding the crude it has yet to sell. The ships can hold more than 30 million barrels of crude, more than a week of Iran’s oil output. Shipping sources say they are nearly full.
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OPEC has rebuffed repeated calls from consuming nations for more crude to try to lower the high price, arguing that oil markets were well supplied.

The crude in storage off Iran to an extent backs OPEC’s claims, but it is the wrong kind of oil.

Refiners need more of the crude they can easily process into diesel and gasoline for the summer, and less of the heavy crude that makes up most of OPEC’s spare capacity.

“Believe me, if this was light Nigerian crude it wouldn’t be sat on a ship,” said one trader. “We’d have bought it.”
Forbes, 14 May 2008

See how it ties together? There is no single ‘oil’, each field has different parts, and produces totally different types of crude, from stuff you can almost burn directly with minimal processing, to tar like crudes that are filled with toxic hydrogen sulfides, what they call “sour”, and which have to be treated by extremely advanced refinineries, like the ones in Texas that process the Venezuelan Orinoco heavy oil, which previously wasn’t even categorized as crude oil, but rather as bitumin, because it was almost impossible to process as crude.

This type of heavy oil requires specialized refineries to crack the sludge into usable forms.

As you can see, and as more details are added to over-simplified news stories, all is not well in Oz today, and it won’t be well tomorrow either.

This entry was posted on Tuesday, May 20th, 2008 at 20:22 and is filed under Our World. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.