World’s Dirtiest Crudes Get Boost From Historic Oil Output Cuts

(Bloomberg) -- Heavier and more sulfurous oil is getting a price boost as production curbs by the OPEC+ alliance tighten the supply of what's generally regarded as lower-quality crude.

Abu Dhabi's Upper Zakum, a grade with high sulfur content, is at the narrowest discount against lighter Murban since 2001, according to official prices set by the emirate's national oil company. Iraq's Basrah grades are also trading at high differentials in the spot market, signaling buyers' willingness to pay a hefty premium above official selling prices set by state-owned marketer SOMO.

Medium and heavy-sour oil is usually much cheaper than lighter and sweeter crudes as it requires more effort and processing to yield gasoline and diesel. However, given that the more sulfurous grades come mainly from Middle East OPEC producers like Saudi Arabia and Iraq as well as sanction-hit Venezuela, they're set to become more scarce as a result of the production cuts.

An increase over the past years in the numbers of sophisticated Asian refineries that can handle dirtier oil is also boosting demand for them. Grades such as Oman and Basrah Light, a medium type of crude, are finding support from traders looking to profit from a recovery in Chinese demand. The difference between Oman crude traded in the Middle East and China is wide enough to create a profitable arbitrage, prompting a flurry of buying interest.

The strength in medium-heavy sour crudes means sellers who opt to deliver a physical cargo of Murban crude for July loading -- as opposed to grades such as Dubai and Oman -- into S&P Global Platts' Market on Close assessment process won't receive a premium. It's the first time that's happened since the quality premium was introduced in July 2016, according to S&P Global Platts data, and compares with a premium of around 64 cents a barrel for June deliveries.

Still, the value of lighter oil versus heavier crude could recover if output from Europe, Africa and North America falls further. North Sea producers are ready to curtail production should storage space run out, while about 3.4 million barrels a day of non-OPEC cuts are already in place, with the figure likely to increase over time, according to Morgan Stanley.