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This year has been turbulent for global energy markets. The COVID-19 pandemic and the March 2020 price plunge sent markets into a tailspin, which saw the North American West Texas Intermediate oil price benchmark plummet into negative territory for the first time in history. Those events, together with the emergence of stricter sulfur levels for fuels, they have caused a shock from the global oil industry and transformed traditional price assumptions. The popularity of sweet crude oil among Asian refineries it is growing at a solid pace. This is an important trend to understand because it creates a situation where many heavy and extra heavy acidic crudes, such as those found in the tar sands of Canada and Venezuela, could become locked assets ahead of schedule. It also saw price differentials between sweet crude and the international benchmark Brent reach all-time highs, with Asian demand for sweet crude rising.
Malaysia’s Tapis grade crude oil, produced in the South China Sea near the Malay Peninsula, has long been recognized as the the most expensive. Its light weight with an API gravity of 42.7 degrees and sweetness, which sees Tapis possess an extremely low sulfur content of 0.04%, makes it highly desirable for refining into gasoline, diesel and other high quality fuels. The popularity of Tapis appears to be dwindling with the fact that it is now trading at a 7% discount on Brent rather than a premium. This can be explained by the growing demand among Asian refineries for other types of high quality crude oil. Earlier this year some unexpected contenders challenged Tapis’ cloak as the most expensive in the world. In September 2020 Australian heavy crudes Vincent and Van Gogh were trading at premiums versus Tapis, despite heavier API gravity of 18.5 and 17 degrees and higher sulfur content of 0.55% and 0.37% respectively. This, like Viktor Katona of Oil ” explained, it was because of their mixing usefulness and extremely low pour points of minus 17 degrees and minus 15 degrees Celsius, respectively. Pour point is an important but often overlooked characteristic of crude oil. It is the lowest temperature at which a crude oil will flow by gravity when cooled, beyond that point it becomes plastic and does not flow, making it impossible to store or transport through a pipeline. The pour point is indicative of the paraffin content of a crude oil blend because higher volumes of paraffin create a superior one pour point. The high paraffin content is an undesirable feature for refineries 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 the low paraffin content, further explain their rise in popularity. There are signs that two grades of Brazilian crude oil could take the crown as the world’s most expensive crude oil. Demand for Brazil’s Lula and Buzios crude oil grades, produced from the country’s offshore pre-salted oil fields, has skyrocketed from the implementation of IMO2020 which limits the sulfur content of marine fuels to 0.5% mass to mass. Both are medium quality 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 a low metal content makes them cheaper and easier to refine into high quality gasoline, diesel and other fuels than to many other crude oil blends.
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This explains the surge in demand for Lula and Buzios among Asian refineries which at the end of September 2020 saw Brazil become the third largest supplier of crude oil to China compared to sixth place in 2018. For September 2020, the Brazilian national oil company Petrobras reported record crude oil exports of just over 1 million barrels per day, with most of those cargoes destined for China. Not only is the second largest economy in the world gaining Brazilian crude oil, there has been an increase in demand from other countries including the United States, Spain, Portugal and the Netherlands. Refineries in other Asian countries, notably India, have said they want to increase imports of Brazilian medium sweet crude quality. The solid and growing demand for Brazilian medium sweet crude oil will drive its price up. The differential between Lula and Brent closed significantly in the last year. Second Oil data “, Lula is trading at a 4% premium on Brent or nearly $ 2 per barrel more. Lula is selling at a premium price of 8.5% at Tapis, which is about $ 3 a barrel more. For the reasons discussed, the price differential between Lula and Brent is likely to widen further, especially if demand from Asia remains strong. The price for Buzios is harder to find, but according to Petrobras like Lula it is trading at a higher price than Brent in China.
While the United States has the largest refining capacity globally of any single country, with a significant portion configured for the cheapest heavy crude oil grades, the combined processing capacity of China, India and other Asian countries significantly exceeds that of North America. Most of these refineries are designed to process lighter, sweeter crude oils, which means that demand for Brazil’s sweet crude oil grades will not only remain strong, but will continue to expand. This explains why Brazil’s pre-salt production continues to expand despite overall crude oil production declining due to uneconomic non-pre-salt, shallow water and onshore wells closed due to the difficult pricing environment. During September 2020, Brazil’s pre-salt oil production reached an average of 2,586,626 barrels per day, 13% higher than the same month a year earlier. This saw pre-salt crude oil production responsible for 70% of Brazil’s total hydrocarbon production compared to 61% the previous year. The Tupi and Buzios fields, which pump Lula and Buzios crude oil, when combined are responsible for 72% of Brazil’s pre-salt oil production.
Petrobras is the driving force behind the growth in pre-salt oil production from its pre-salt operations pumping 1.65 million barrels per day on average for the third quarter of 2020. This was nearly 21% more year-over-year. and made 62% of Brazil’s pre-sale total. salt production. The Brazilian national oil company is investing heavily in intensifying activities in the Buzios field to increase production of what is becoming a very popular low-sulfur medium crude oil. Strong demand for quality oil from Lula and Buzios, coupled with their premium to Brent and an expected recovery in oil prices during 2021, will boost Brazil’s oil revenues and Petrobras’ profits.
Editor’s note: Find Brazilian crude and 150 other global crude blends on Oil ” Oil price data page.
By Matthew Smith for Oil “
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