WHAT IS DRIVING LIGHT-HEAVY SPREADS WIDER, AND WILL IT LAST?

Light-to-heavy crude oil spreads have widened significantly in recent months. In contrast to the previous spike of 2001, CERA does not anticipate a rapid correction in this spread. Values for the light-heavy benchmark WTI-Maya spread are expected to narrow gradually through the end of 2005 but still remain above the long-term average. Several market conditions underlie this outlook:

- Incremental crude production has shifted to heavier grades with the boost in output from Middle East OPEC countries.
- Relatively tight inventories will continue to affect efficient management of the downstream supply chain, which can add to feedstock and refined product price volatility.
- Limited expansion of new deep conversion at refineries will not help to offset the incremental output of heavy fuel oil.
- Given the structural decline in demand, incremental production of heavy fuel oil is resulting in depressed fuel oil prices and weighing on heavy crude values.

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CERA Reports Online, a wholly owned subsidiary of IHS Energy, is a leading advisor to international energy companies, governments, financial institutions, and technology providers. CERA delivers critical knowledge and independent analysis on energy markets, geopolitics, industry trends, and strategy. CERA's expertise covers all major energy sectors--oil and refined products, natural gas, and electric power--on a global and regional basis.