well since i havent seen anyone keep the discussion going here is what i found today.
BUY OR SELL-Should heavy crude cost as much as light?
3:55 PM ET 08/12/2009
By Joshua Schneyer
NEW YORK, Aug 12 (Reuters) – Heavy, sour crude has rallied against light, sweet crude in recent months, bringing grades like Mexico’s Maya <O#MYA-> and U.S. Mars sour <MRS-> into close range with light-sweet crudes, such as West Texas Intermediate <CLc1>.
Maya’s discount to WTI is around $4.63 a barrel, well below 2008’s $11.60 a barrel and the five-year average of $13.15. (Click here for a graphic: http://graphics.thomsonreuters.com/089/CMD_SP0809.jpg ) Mars is trading at a rare premium to WTI.
Light/sweet crude normally fetches large premiums since it is easier to refine into prized light fuel. But high inventories of light crude and fuels, along with OPEC supply cuts, have helped boost heavy grades.
Higher heavy prices are bad news for refiners like Valero <VLO.N> that invested billions to process more sludgy crude. Many heavy crude producers, as well as traders who stockpile crude or arbitrage spreads, profit from the unusual spreads.
Are heavy/sour crudes about to strengthen even further?
Heavy crude may rally in coming months, and big discounts for heavy crude may never return, some experts say.
“OPEC has been cutting supply of mostly heavy/sour crude and that’s going to continue. A light crude glut in the U.S. will continue to pressure the price of near-term WTI. That will strengthen heavy,” a Houston-based cash crude broker said.
OPEC agreed to cut output by 4.2 million barrels since late 2008, restricting shipments of heavy/sour crude.
“Much of OPEC production is “heavy”, as well as high sulfur. Thus their unpredictable actions, expectation of actions, cheating, not cheating (or) changing outputs can bring a huge change in light-heavy price differentials very quickly,” said Carl Holland, head of Energy Trading Solutions.
A trader said refiner investments in coker units to process more sludgy crude may keep heavy crude differentials strong.
The high price of heavy products like fuel oil versus light products helps heavy crude, which renders more heavy fuel.
U.S. Gulf Coast residual fuel oil traded at 92 percent of the value of WTI on Tuesday, up from an average ratio of between 70 to 75 percent before this year, a trader said.
Some believe heavy crude’s heyday may soon end. Brad Samples, analyst at Summit Energy, said light oil demand should recover on economic recovery in OECD countries.
“I wouldn’t expect spreads favoring more heavy or sour crudes to widen more,” Samples said. “By the end of 2009 we’ll probably see demand begin recovering for the lighter crude.”
Historically low natural gas prices give power plants a cheap alternative to burning residual fuel, Samples said.
“I see (light/sweet) crude getting somewhat stronger than sour over next month or so. We could see tightness in sweet grades due to maintenance in the North Sea,” said another cash crude trader.
“I think sweet grades will remain in demand as refiners opt to minimize distillate fuel production and keep gasoline supplies at adequate levels.”
(Additional reporting Joe Silha; Editing by David Gregorio)