EIA: production cuts drive sour crude price increases

In early June 2023, OPEC+ members announced they would extend their production cuts through 2024. Saudi Arabia also announced it would reduce production by an additional 1 million bpd for July 2023. The voluntary Saudi production cuts were extended several times, and Saudi Arabia announced on 5 September 2023 it would extend the additional cuts through the end of 2023. Most of Saudi Arabia’s crude oil contains more than 1% sulfur, the EIA's threshold for classifying crude oil as sour, although Arab Extra Light and Arab Super Light are considered sweet. The production cuts are having a larger impact on the price of sour crude oils, although global crude oil inventory draws are also putting upward pressure on light, sweet benchmarks such as Brent and West Texas Intermediate (WTI).

Light, sweet crude oils typically trade at a premium compared with sour crude oils because they are less costly to refine and tend to produce higher yields of more valuable products. Sweet and sour crude oil price spreads have narrowed in most major trading hubs, including those in North America, Europe, and the Middle East.

Between 7 July 2023 and 25 August 2023, US commercial crude oil stockpiles declined 8%. Most US crude oil production is light, sweet crude oil, and the price of Magellan East Houston (MEH) increased more than the price of Mars, widening the spread. After Saudi Arabia’s 5 September 2023 announcement to extend its production cuts through the end of 2023, the spread between MEH and Mars narrowed again to $0.61/bbl as of 6 September 2023.

Globally, sour crude oil prices are also increasing compared with other sweet benchmark crude oils. Medium, sour Dubai Fateh (an Asia/Middle East benchmark), which is similar to Saudi Arabia’s Arab Light, recently traded at a price premium to light, sweet Dated Brent, reversing the typical trend.

The extent and duration of the current market dynamics, with sour crude oil prices trading unusually high, remain uncertain. On the supply side, OPEC+ and Saudi Arabia’s crude oil production and OSPs will have direct impacts on the price of sour crude oil. Demand for sour crude oil may increase as new Middle East refineries come on line, providing additional support for sour crude oil prices.

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