Lighter U.S. Permian Crude Risks Losing Favor with Refiners Due to Processing Challenges

(Reuters) — Companies drilling for the crude that turned the U.S. into the world's top oil producer face an unexpected dilemma: their West Texas Midland crude is getting lighter, which could make it less appealing to some refiners.

Super-light crudes would have to be blended with heavier grades for processing into gasoline, diesel and jet fuel. Less supply of heavy crude and high prices for it could cut demand for WTI Midland. This could result in lower prices for the globally used dated Brent benchmark of which WTI has become an integral part.

The volume and quality of the flagship U.S. crude has made it popular with refineries in Asia and Europe, thanks to its similarity to other benchmark grades and a low sulfur content that makes it relatively easy to remove during processing.

It has become a central part of Brent, a group of North Sea grades used to price over 75% of the world's crude.

But shale producers in the Permian basin of west Texas and New Mexico have been pumping lighter crude. Recent testing shows the oil's gravity, or measure of density, is between 41 and 44 degrees, said sources who declined to be identified as the data is confidential.

WTI Midland crude historically has a gravity of about 38 degrees to 42 degrees. The higher the number, the lighter the oil.

Shale producers are pumping lighter oil as they exhaust first-tier production areas and move into second-tier acreage. These wells yield more natural gas, with crude pushing into super-light territory.

Generally, lighter crude is more valued than heavier crude, but refineries are set up for specific densities, usually not super-light crude. Refiners look for crude that can deliver the best margins from existing gear. Converting units to run lighter crudes economically would require investing in new equipment.

Lighter crude tends to produce higher volumes of petrochemical feedstock naphtha when it is refined, and less of the more profitable diesel and jet fuel. Some refining towers may not be built to handle higher volumes of naphtha and refiners may be forced to cut how much crude they run overall.

Hydrocrackers, processing units that break heavy molecules into smaller ones via high heat and pressure, would be underutilized if crude was lighter, Kpler lead crude analyst Viktor Katona said. Reformer units, which process naphtha into a component of finished gasoline, would need to run harder.

While hydrocrackers can be more expensive to run, it helps produce higher margin diesel and jet fuel that refiners are keen to sell.

"One would need to reconfigure the refinery, build completely different units, bigger units for light distillates (like naphtha), smaller units for middle distillates (like diesel) and no one has the money for that," Katona added.

With gasoline demand likely to peak as more people work from home and many adopt electric vehicles, refiners are reluctant to make large investments into plants, sources and analysts said.

Two to Tango

"Refiners will have to blend it (lighter WTI Midland) to make it a little bit more heavier and better aligned with processing units that they have invested capital in," said Rommel Oates, founder of refining software company Refinery Calculator.

Pipeline companies that buy from shale producers could also look to blend the crude with other grades like West Texas Sour to meet export specifications, analysts said.

"WTI (Midland) needs to have a partner - a heavy crude - to tango with, because otherwise you don't want to run it, but we might reach a stage when the heavies are just too expensive for them to be blended down with WTI (Midland)," Katona said.

The cost of mixing crudes could cause demand to fall for WTI Midland. That, in turn, would depress the price of dated Brent, unless Platts removes WTI Midland from the assessment or limits acceptable gravity.

"A lighter WTI Midland will just weaken the benchmark because WTI Midland now becomes slightly less valuable," RBN Energy analyst Robert Auers said. Dated Brent prices could ease by as much as 50 cents per barrel if WTI Midland gets lighter, he added.

Platts, part of S&P Global, currently assesses trades and publishes price for WTI Midland with an API gravity between 40-44 degrees. A spokesperson said they monitor the quality of Midland crude and can launch a standard industry consultation if a quality review is required.

Refiners, pipeline operators and others have begun discussing the need for a lighter gravity benchmark, which would help buyers differentiate WTI Midland from super-light streams of oil, sources said.

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