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.
