Saudi Arabia, Iraq and other Middle Eastern suppliers of heavy, high-sulphur crude could take a hit as refiners favour lighter, low-sulphur grades that they can process more easily into less-polluting fuels.
Tuesday 26, March 2019
(Bloomberg) --The world’s biggest oil-exporting region may lose billions of dollars in annual revenue when an unknown United Nations requirement for ships to burn cleaner fuel takes effect next year.
The UN maritime agency’s new rule kicks in on 1 January, and estimates of the possible price impact vary widely.
Revenues could drop by $5 a barrel starting in the second half as refiners and shippers prepare for the change, Citigroup says. Some traders expect a less dramatic slide, but even Saudi Energy Minister Khalid Al-Falih, whose country ships more oil than any other, sees a $1 reduction for some grades.
A shift in demand away from more viscous and sulphurous -- or “sour” -- crudes would add to financial pressure on the region’s producers. OPEC and its allies are voluntarily curbing production for the third year to try to prop up prices in the face of burgeoning US shale output, which is also lighter and easier to refine. While heavy-sour crude currently sells near its smallest discount to lighter grades in a decade, that gap is set to widen on the new rule.
The ship-fuel requirement adds a layer of complexity to an oil market already jarred by the global production cuts -- since most of the missing barrels are heavy and sour -- as well as lost supplies from Venezuela, Iran and even Canada.
The Middle Eastern producers selling about 20 million barrels a day are expected to lose anywhere from $7 billion to $37 in annual revenue. That equates to as much as eight per cent of regional sales, based on an average price of $63 this year.
The price impact on Saudi Arabia, Iraq, Iran as well as Kuwait, the UAE, Qatar and Oman should lessen over the next several years as refiners upgrade their facilities to produce more of the low-sulphur fuel.
The new rule is likely to widen the spread between sour crudes and those that are “sweet,” or low in sulphur. Refiners that process heavy, sour oil tend to produce a lot of bunker fuel, the mainstay of the shipping industry, along with diesel and jet fuel. Those that process lighter, sweeter barrels produce more gasoline.
Middle Eastern blends have sold historically at a discount to lighter grades. That spread has narrowed as the OPEC cuts heavy-sour output and production of lighter US shale oil swelled.