This could become the World’s most expensive crude oil

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This year has been turbulent for global energy markets. The COVID-19 pandemic and March 2020 price crash sent markets into a tailspin, which saw the North American oil price benchmark West Texas Intermediate plunge into negative territory for the first time in history. Those events, along with the emergence of stricter sulfur contents for fuels, have precipitated a shake out of the global oil industry and transformed traditional pricing assumptions. The popularity of sweet crude oil among Asian refiners is ratcheting upward at a solid clip. This is an important trend to understand because it creates a situation where many heavy and extra-heavy sour crudes, like those found in Canada’s oil sands and Venezuela, could become stranded assets sooner than expected. It has also seen the price differentials between sweet crude oils and the international Brent benchmark reach all-time highs, with the Asian demand for sweet crude soaring higher.

Malaysia’s Tapis grade crude oil, produced in the South China sea near the Malaysian peninsula, has long been recognized as the world’s most expensive. Its lightness with an API gravity of 42.7 degrees and sweetness, which sees Tapis possessing extremely low sulfur content of 0.04%, makes it highly desirable for refining into high quality gasoline, diesel and other fuels. Tapis’ popularity appears to be waning with it now trading at a 7% discount to Brent, rather than a premium. That can be explained by the growing demand among Asian refiners for other high-quality crude oil grades. Earlier this year some unexpected contenders challenged Tapis’ mantle as the world’s most expensive. By September 2020 Australian heavy sweet crudes Vincent and Van Gogh were trading at premiums to Tapis despite heavier API gravities of 18.5 and 17 degrees and higher sulfur content of 0.55% and 0.37% respectively. This, as Oilprice.com’s Viktor Katona explained, was because of their blending utility and extremely low pour points of minus 17 degrees and minus 15 degrees Celsius, respectively. The pour point is an important but often ignored characteristic of crude oil. It is the lowest temperature at which a crude oil will flow under gravity when cooled, beyond that point it becomes plastic and will not flow, making it impossible to store or transport through a pipeline. The pour point is indicative of a crude oil blend’s paraffin content because greater volumes of paraffin create a higher pour point. High paraffin content is an undesirable characteristic for refiners because it increases the difficulty and cost of processing crude oil. The extremely low pour points of Vincent and Van Gogh crude oil grades, and hence low paraffin content, further explains the surge in their popularity. There are signs that two Brazilian crude oil grades could take the crown as the world’s most expensive crude oils. Demand for Brazil’s Lula and Buzios crude oil grades, which are produced from the country’s offshore pre-salt oil fields, has soared since the implementation of IOM2020 which caps the sulfur content of maritime fuels at 0.5% mass by mass. Both are medium grade sweet crude oils with API gravity of 29 degrees and 28.4 degrees respectively and low sulfur content of 0.27% and 0.31%. Lula and Buzios also possess low pour points of around 9 degrees Celsius, indicating low volumes of paraffin, which when combined with low metals content makes them cheaper and easier to refine into high quality gasoline, diesel and other fuels compared to many other crude oil blends.

This explains soaring demand for Lula and Buzios among Asian refiners which by the end of September 2020 saw Brazil became the third largest supplier of crude oil to China compared to sixth place in 2018. For September 2020, Brazil’s national oil company Petrobras reported record crude oil exports of just over 1 million barrels daily, with most of those cargoes destined for China. It is not only the world’s second largest economy which is snapping up Brazilian crude oil, there has been a surge in demand from other countries including the U.S., Spain, Portugal and the Netherlands. Refiners in other Asian countries, notably India, have flagged that they wish to increase imports of Brazilian medium sweet crude oil grades. Solid and growing demand for Brazilian medium sweet crude oil will drive its price higher. The differential between Lula and Brent has closed significantly over the last year. According to Oilprice.com data, Lula is trading at a 4% premium to Brent or almost $2 per barrel more expensive. Lula is selling at an 8.5% premium price to Tapis, which is equal to around $3 per barrel higher. For the reasons discussed, it is likely that the price differential between Lula and Brent will widen further, especially if demand from Asia remains strong. Pricing for Buzios is more difficult to find, but according to Petrobras like Lula it trades at a premium to Brent in China.

While the U.S. has the greatest refining capacity globally of any single country, with a significant portion configured for cheaper heavy sour crude oil grades, the combined processing capability of China, India and other Asian countries significantly exceeds that North America. Most of those refineries are designed to process lighter sweeter crude oils, meaning demand for Brazil’s sweet crude oil grades will not only remain strong but keep expanding. This explains why Brazil’s pre-salt production continues to expand despite overall crude oil output falling because of uneconomic non-pre-salt, shallow water and onshore wells being shuttered because of the difficult pricing environment. During September 2020, Brazil’s pre-salt oil production reached an average of 2,586,626 barrels daily which was 13% greater than for the same month a year earlier. This saw pre-salt crude oil output responsible for 70% of Brazil’s total hydrocarbon production compared to 61% a year earlier. The Tupi and Buzios fields, which pump Lula and Buzios crude oil, when combined are responsible for 72% of Brazil’s pre-salt oil output.

Petrobras is the driving force behind growing pre-salt oil production from its pre-salt operations pumping on average1.65 million barrels daily for the third quarter 2020. This was almost 21% greater year over year and made 62% of Brazil’s total pre-salt production. Brazil’s national oil company is investing heavily in ramping-up activity in the Buzios field to grow production of what is becoming a highly popular, low sulfur content medium crude oil grade. Strong demand for Lula and Buzios oil grades, coupled with their premium to Brent and an anticipated oil price recovery during 2021, will boost Brazil’s oil revenue as well as Petrobras’ profits.