An overview of crude tanker industry (Part 6 of 10)
Oil is not all the same
One must also know that crude oil found at different locations is not all the same. The two main characteristics used to describe oil is density and sulfer content. Crude oil with less sulfer are considered “sweeter” while those with more sulfer are tagged “sourer”. This is pretty important because different refining specifications are required to process oil with different densities and sulfer contents.
Much of the shale oil produced in the United States is of high quality content. They are sweet and some of the lightest oil in the world. Oil found in North Sea (Brent), Libya, Nigeria, Malaysia, and Algeria are among the sweetest in the world. On the other end, Mexican crude, Kuwait, and UAE have lower quality crude.
Refining capacity is important
Because refineries must be altered to refine different quality of crude, it doesn’t mean that U.S. can replace all of its heavy crude oil imports with domestic crude that are lighter and sweeter. In order to do that, refiners must make adjustments to their machinery or add more capacity to refine lighter and sweet crude.
If U.S. domestic refiners are out of capacity to refine sweet crude, then it could support foreign oil imports. Thus, U.S. refining capacity for sweet crude is another factor that affects demand for tankers. Excess or additional capacity for refining high quality crude bodes poorly for crude tankers but if there’s no more capacity to refine high quality fuel, U.S. oil imports will be supported. Investors shouldn’t take refining capacity additions as simple as black and white. If more refining plants are added to countries like China , they could point to higher demand for tankers in the near future if it benefits oil imports.
Information on refining capacity by oil quality mix is harder to come by. But investors could get a sense of refining capacity walls by looking at changes in different oil price benchmarks (like the WTI-Brent spread or LLS-Brent differential) and in the quality of oil being imported by different countries. Countries like Algeria and Nigeria hold some of the highest quality oil in the world. Another way to see how refining capacity could be limited is by following U.S. import of oil from specific countries that generally produces the kind of oil quality.
Browse this series on Market Realist:
- Part 1 - Overview and cheat sheet of investing in crude oil shipping industry
- Part 2 - Why is OPEC important to crude tanker’s business
- Part 3 - 3 major groups of importers key to OPEC oil and tanker demand
- Commodity Markets
- Oil, Gas, & Consumable Fuels
- crude oil
- sweet crude