As Saudi Arabia tightens supply, sour crude oil prices skyrocket

Saudi Arabia and its partner OPEC+ members’ production restrictions may not have increased worldwide crude oil futures, but the lower supply from the world’s largest crude exporter has pushed sour crude prices soaring in recent weeks.  

OPEC+ producers agreed in early June to extend current cuts until the end of 2024, while OPEC’s biggest producer, Saudi Arabia, stated it will voluntarily lower output by 1 million bpd in July to about 9 million bpd. Saudi Arabia announced last week that it would extend its unilateral 1 million bpd production reduction into August and hike the prices of some of its grades – all of which are sour – for August loading for Asia. 

Saudi Arabia and other Middle Eastern producers’ cuts, which began in May, have already had a significant impact on medium-sour and heavy supplies, and prices are rising. In contrast, lighter crude, such as Brent and other grades backing the Brent standard, has been more readily available. In other words, the physical tightness in sour oil grades hasn’t been reflected in the international Brent oil benchmark, which has yet to rise beyond $80 a barrel despite all of OPEC+ and Saudi Arabia’s cuts. 

Due to a lack of supply of Saudi and other Middle Eastern sour crude, buyers are looking for alternatives elsewhere, driving up sour crude prices. 

Prices for sour grades in the United States, Canada, and the North Sea, for example, have risen. According to Reuters, US Mars sour oil traded at a $2 per barrel premium to US crude futures at the Cushing hub at the end of last week, the largest Mars premium in three years. In an unusual pricing reversal, Mars is also selling at a premium to WTI Midland, a light sweet crude.

In Canada, Alberta’s heavy Western Canada Select (WCS) has decreased its discount to the WTI benchmark to $10 per barrel, the smallest differential since Alberta legislated output curbs in 2019.

In Norway, medium sour Johan Sverdrup crude from the huge oilfield of the same name traded at a record-high premium to Dated Brent on Friday, at $3.50 a barrel. According to Bloomberg, the Saudi price increase and limited supply of Saudi crudes have caused Johan Sverdrup prices to rise. Because to the greater sulfur concentration of the Norwegian grade, Johan Sverdrup often trades at a discount to Dated Brent. Johan Sverdrup was trading at a $6 per barrel discount to Dated Brent six months ago.

Key notes:

• Saudi Arabia and other OPEC+ producers have reduced their oil production, leading to a drop in the supply of medium-sour and heavy crude, which has caused sour crude prices to rally.
• With the reduced supply of Saudi and Middle Eastern sour crude, buyers are looking for alternatives, driving up prices of U.S., Canadian, and North Sea sour grades.
• U.S. Mars sour crude traded at a $2 per barrel premium to U.S. crude futures, the highest in three years, while Canada’s heavy Western Canada Select has narrowed the discount to the WTI benchmark to $10 per barrel, the narrowest discount since Alberta mandated production cuts in 2019, and Norway’s Johan Sverdrup crude traded at a record-high premium over Dated Brent at $3.50 per barrel.

Risk disclaimer:

Please note that this article does not offer any instructions or suggestions regarding investment decisions. It is important for you to conduct your own research or seek professional advice from a qualified professional before conducting an investment decision.