While Brent, the global benchmark for crude oil, is topping $100 a barrel, an unusual glut of heavy crude (high-density oil used to produce diesel, gasoline, and more) is building in North and South America. Competition to secure crude continues in Asia and Europe, but freight rates for tankers have surged in the wake of the U.S.-Iran war, making it harder to ship excess heavy crude from the Americas. In the Americas, crude supply has increased, but additional processing capacity at refineries is limited, causing inventories to pile up.
According to Reuters on the 12th local time, an oversupply of heavy crude in North and South America has recently deepened. Unlike light crude, heavy crude is denser and heavier. It is generally cheaper than light crude, so refiners equipped to process heavy crude have used it to cut production costs and boost profitability. But lately, even as heavy crude prices fall, refiners in Asia and Europe are finding it difficult to buy.
Shipping to Asia costs $40 a barrel; even cheap crude is hard to export
The biggest reason is the spike in tanker freight rates. Last week, the cost to ship crude from the Americas to Asia on a very large crude carrier topped $80 million (about 107.5 billion won). That is about $40 a barrel, more than five times the $10 million to $15 million (about 13.4 billion to 20.1 billion won) at the start of the year.
Costs to ship crude to Europe have also jumped. According to maritime analytics firm Signal Maritime, last week the expense for a very large crude carrier heading from the U.S. Gulf Coast to Europe, including ship-to-ship transfer expense and other charges, was estimated at about $46 million (about 61.4 billion won). That is $24.50 a barrel, seven times the roughly $6.5 million (about 8.6 billion won) before the outbreak of the U.S.-Iran war at the end of February.
Freight rates have soared because tankers have become scarce. Since the U.S.-Iran war, ship-to-ship crude transfers in the Gulf of Oman have continued, tying up a large number of tankers. As the number of vessels available for other routes worldwide has declined, rates have surged. Scott Shelton, an energy specialist at energy broker TP ICAP, told Reuters, “The key is the shipping cost,” adding, “There is demand for tankers, but rates are rising and the number of available vessels is shrinking.”
As shipping costs rise, prices for heavy crude from the Americas have fallen. According to oil price agency Argus Media, key heavy crude grades from Canada, Colombia, and Ecuador have dropped more than $10 a barrel to a six-week low. As of the 8th, excluding freight and insurance, Canada’s Western Canadian Select (WCS) traded around $74 a barrel, Colombia’s Vasconia around $84, and Ecuador’s Oriente around $76.
Even as prices for heavy crude from the Americas fall, the global benchmark for crude remains above $100 a barrel. With shipping expense to demand centers surging, the supply-demand imbalance between production sites and consumers has widened.
Crude supply has increased but refining capacity is lacking; U.S. utilization at highest in 28 years
There are also limits to how much additional heavy crude U.S. refineries can absorb now that it has become harder to ship abroad. Crude supply in the Americas is rising, but U.S. refiners are already producing at high utilization rates.
After the United States arrested former Venezuelan President Nicolás Maduro in January, it pushed to restart the local oil industry, sending Venezuela’s crude exports surging. Canada’s crude output has also hit an all-time high. More than 130 million barrels released from the U.S. government’s Strategic Petroleum Reserve have been supplied to the market.
But U.S. refineries have limited capacity to handle the increased supply. According to the U.S. Energy Information Administration (EIA), the average weekly utilization rate of U.S. refineries so far this year is about 93.5%, the highest in 28 years.
U.S. refiners are maximizing output to secure revenue amid a spike in diesel prices. Gulf Coast refiners have already bought as much heavy crude as they can handle, Reuters said.
Constraints include not only overall refinery utilization but also the types of crude that can be processed. To increase heavy crude runs, refineries need spare capacity in coker units that further break down heavy residues from the refining process. Some U.S. refineries are designed for Mars Sour crude produced offshore in the Gulf of Mexico, so to process Canadian or Venezuelan heavy crude they must blend in lighter grades.
In the end, the Americas are finding it hard both to export the increased crude and to process more of it at U.S. refineries. With bottlenecks in both shipping and refining, heavy crude from the Americas is oversupplied and prices are falling even as global oil prices remain high.
