The world is craving for medium sour crude, middle distillates and heavier products. Deep cuts by OPEC+ has created a super tight market for medium to heavy crudes. So tight that Dubai crude now trades at a USD 0.6/b premium to Brent crude rather than a normal discount. All of Russia’s crudes are now trading above the USD 60/b price cap set by the US. Scarcity of such crudes, rich on middle distillates and heavy products, is naturally leading to a scarcity of middle distillates and heavier products. Global inventories of such products are now very low and refining margins are skyrocketing with diesel in Europe now at USD 125/b. There is no sign that Saudi Arabia will shift away from its current ”price over volume” strategy as it is expected to lift its official selling prices for October. Crude oil at USD 85/b is a blissful heaven for Saudi Arabia. As long as US shale oil is shedding drilling rigs at a WTI oil price of USD 80/b there is no reason for Saudi Arabia to fear any shale oil boom which potentially could rob if of market shares. So ”price over volume” is the name of the game. 

Production by OPEC+ has declined by 2.7 m b/d from Sep-2022 to Aug-2023. Most of this reduction has taken place since February this year. Global demand on the other hand has increased by 2.4 m b/d from Q3-2022 to Q3-2023. This counter move between supply from OPEC+ vs. global demand has been partially eased by a 1.4 m b/d increase in supply by OECD producers, mostly US shale oil (light sweet crude).

There has thus been a massive tightening in the supply of medium sour crude (medium weight and sulfur > 1%) from OPEC+. Naturally so because this is the type of crude which OPEC+ predominantly is producing. So when the organisation makes deep cuts it leads to a tightening of the medium sour crude market.

The situation has been exacerbated by several factors. The first is Europe which no longer is importing neither crude nor oil products from Russia. The EU28 used to import 4.3 m b/d of crude and products from Russia before the war in Ukraine. Predominantly medium sour crude (Urals), lots of diesel but also lots of heavier components like VGO and different kinds of heavy refinery residues like bunker oil etc. Refineries are huge, complex, specialized machines which are individually tailor made for specific tasks and feed stocks. Without the specific feed stocks they were made for they typically cannot run optimally and have to run at reduced rates thus churning out less finished oil products. Europe has to some degree been able to import medium sour crude from the Middle East and other places to replace the 4.3 m b/d of lost supply from Russia, but it has also been forced to replace it with light sweet crude from the US which is yielding much less diesel or heavier products. The Vacuum Gasoil (VGO) and other heavy feed stocks which the EU used to import from Russia were typically converted to diesel products in deep conversion units. The second factor which has added to the problem is that more than 5 m b/d of global refining capacity has been decommissioned globally since 2020. Global refining capacity actually contracted in 2021 for the first time!

But bottom line here is that the global market for medium sour crude is now super tight. Predominantly as a result of deep cuts by OPEC+. This has amplified the factors above and led to a super tight situation in medium heavy to heavy products (diesel, jet, bunker oil, etc). It is so tight that bunker oil (HSFO 3.5%) in Europe recently traded at a premium to Brent crude rather than a normal discount of USD 10-20/b. This hasn’t happened since the 1990ies! Another sign of the tightness in medium sour crude is that Dubai crude (API = 31, Sulfur = 2%) now is trading at a premium to Brent crude  (API = 38, Sulfur = 0.5%) versus a normal discount of more than USD 2/b.

Global middle distillate stocks are very low as we now head into winter. Inventories of middle distillates and jet fuel in the US is almost equally low as they were one year ago.

The tightness in medium sour crude and diesel products has sent refinery margins skyrocketing. The price of diesel in Europe ARA is now standing at USD 125.2/b. That is down from the crazy prices we had one year ago when diesel prices in Europe almost reached USD 180/b. But current diesel price is on par with the price of diesel from 2011 to 2014 when Brent crude averaged USD 110/b. The diesel refining premium in ARA is now USD 40/b and the premium for jet fuel is USD 45/b. Refineries usually make a profit on diesel, jet and gasoline, a loss on bunker oil and a total refining margin for turning crude oil to products of maybe just USD 5/b before operating and capital cost leaving them with limited or even negative margins overall. Now they are making a killing. As a result they will buy as much crude as they can and turn it into the needed products. What they want more than anything is medium sour crudes which have rich contents of middle distillates. But the supply of that crude is now super tight due to deliberate cuts by Saudi Arabia and now also Russia.

There is no sign that Saudi Arabia and Russia will back down any time soon. Saudi Arabia is about to set its official selling prices (OSPs) for October and indications are that they will increase their prices. That implies that Saudi Arabia will continue its ”price over volume” strategy. No signs that they will change on this any time soon. US shale oil producers are still shedding drilling rigs and supply growth there is slowing = Power to OPEC+ to control the market.

Saudi Arabia will also decide over the coming days what they will do with their unilateral production cut for October. Will it roll forward their current production of 9 m b/d or will they add some crude and lift it to for example 9.5 m b/d? Hard to say, but what is clear is that the global market currently is craving for more diesel, heavy products and medium sour crude. Our view is that Saudi Arabia will not risk driving crude oil prices to USD 100 – 110/b or higher through deliberate cuts as this will lead to elevated political storm from the US and maybe also from China. We think that Saudi Arabia is utterly happy with the current oil price of USD 85/b and want to keep it at that level. Getting it exactly right is of course tricky, but they do have the capacity to at least get it ballpark right. 

Russia should be super happy. The tight medium sour crude market has sent the price of all their crude  exports to above the USD 60/b cap. The price of Urals has increased from USD 50/b in May to now USD 71/b. This is of course a headache for the western who is trying to limit Russian oil revenue.

Deep cuts by OPEC+ over the past year. In total 2.7 m b/d since Sep 2022. But accelerating cuts since February 2023. Deliberate cuts by Saudi Arabia and in part by Russia. It has created a super tight market for medium sour crude as global demand has rallied 2.4 m b/d over the past year.

Price spread Dubai – Brent. Dubai usually trades at a discount to Brent crude. Now it trades at a premium of USD 0.6/b. Highly unusual! A sign of a very tight medium sour crude oil market.

The price discount for Russian Urals crude is evaporating as the market for medium sour crude oil has tightened.

ARA diesel prices have rallied since their low point in April. Diesel in ARA now costs USD 125/b and equally much as it did from 2011 to 2014 when Brent crude traded at USD 110/b.

Refineries are making a killing as refining margins for diesel, jet and gasoline have skyrocketed while the usual loss making component, bunker oil, now almost trades on par with Brent crude. Refineries, the primary buyers of crude, will buy as much crude oil as they can to make yet more money. This should help to keep demand for crude oil elevated and thus prices for crude oil elevated.