Slide 6 of 25
Notes:
- If light crude supply is increasing relative to heavy crude supply, it tends to contract
the differential.
- On the other hand, if heavy crude supply is increasing relative to light crude supply,
the extra heavy supply tends to expand the differential. Generally refiners with the
ability to upgrade the heavy ends of the barrel run their downstream upgrading units
(e.g., cokers) at or near capacity. If additional heavy crude oil comes on the market,
refiners that buy the crude oil can’t run more heavy ends through their upgrading
equipment, so they just produce more residual fuel. Unless demand for residual fuel is
increasing, they will oversupply the residual market and not get good prices for the fuel.
Thus, they will want to pay less for more heavy crude oil, thereby depressing its price
relative to lighter crudes. If this continues over the long term, the depressed price
provides an incentive for refiners to add more upgrading equipment in order to make use of
the “cheaper heavy crude oil” and decrease residual fuel production. But note
the irony. If enough refiners add upgrading, the “cheap” crude will no longer be
so cheap.
- Finally crude price changes can also affect the difference. When crude prices move, the
light, higher valued crudes tend to move more -- both up and down -- which will be
discussed more on the next slide. Thus, tightening markets with price increases -- all
else being equal -- would tend to increase price differences, and falling crude price
markets would tend to decrease differences. But frequently, all else is not equal. One
factor does not change alone.
