Singapore: Prices of West Asian sour crude could extend this year’s rally to reach unprecedented parity with petrol-rich sweet grades in the coming months, as the world’s biggest new refinery in a decade fires up its furnaces.
Reliance Industries Ltd’s 580,000 barrels per day, or bpd, plant, formally commissioned on 25 December in time to meet a year-end target, enters a global oil market that has turned upside down since it was launched in mid-2005 amid a global refining capacity squeeze and as producer cartel Organization of the Petroleum Exporting Countries, or Opec, pumped every barrel it could.
Now, instead of hoovering up discounted, surplus heavy-sour crude from Opec, Reliance may be chasing fewer barrels as the cartel cuts output by record volumes in a bid to cope with shrinking demand and put a floor under prices that have fallen at least $100 (Rs4,880) since July. The discount for benchmark sour Dubai crude to light, sweet Brent—which stood at $5.90 in June—has already rallied to $1.20 a barrel, near the at least eight-year high of 80 cents hit in August.
The discount had widened to nearly $10 a barrel in late 2004, as Opec struggled to tame the early stage of oil’s rally by pushing even more of the dense, high-sulphur crude at refiners who did not have the capacity to process those lower-value grades into the high-end diesel and petrol that consumers demanded.
Now the tide has changed, with Opec throttling back supplies just as refiners commission a sophisticated new kit that will allow them to convert the bottom end of the barrel into top-notch fuels.
Taking the lead is Reliance, whose refinery is the most complex of its size and will not produce a drop of residual fuel.
With Opec’s cuts affecting the group’s cheaper, high-sulphur crudes more than its coveted lighter, cleaner grades, more gains are possible, even before Reliance gets in full swing.
“It could flip to a premium, depending on how much Opec implements,” one crude oil trader based in Singapore said.
The new $6 billion export-oriented refinery, operated by subsidiary Reliance Petroleum Ltd, sits alongside the company’s 660,000 bpd plant built a decade ago in Jamnagar.
On its own, the new plant is the world’s sixth largest refinery; taken together, the complex on India’s west coast is the world’s largest.
While crude traders are bracing for more volatility in spreads, the greater impact is likely to be felt on profit margins for global refiners forced to compete with Reliance’s low cost and high efficiency, once large-scale exports commence from April, when it can take full advantage of a tax break.
“The effect on crude spreads may be limited, but it will hammer product markets for sure,” said another trader.
One of the most important factors to consider may be Chevron, which analysts say is unlikely to take up an option to raise its 5% stake in subsidiary Reliance Petroleum to a full 29% next year, potentially scuppering an apparent deal to absorb some of the oil producers’s heaviest crudes.
Al Troner, managing director of Asia Pacific Energy Consulting, said Chevron had earmarked a chunk of its rising production of heavy, sour, high-metal crude in the neutral zone between Saudi Arabia and Kuwait for Jamnagar. It sealed a 30-year extension on those operations in September. “The combination of Reliance having to look for replacement West Asia Gulf heavy sour, plus the Opec cutbacks, plus (further down the road) some further domestic refining use of similar crude production could tighten heavy/sour avails substantially and keep the delta tight,” he said.