LIGHT-HEAVY OIL SPREADS: PERMANENT SHIFT, TEMPORARY SPIKE, OR SOMEWHERE IN BETWEEN?
The unprecedented and sustained gap in prices between light and heavy oils has created much uncertainty for producers, refiners, and investors. Are these differentials here to stay? In CERA's view, significantly wider-than-historical light-heavy spreads are likely to remain in 2005 and 2006, thanks mainly to strong light products demand growth and bottlenecks in refinery conversion capacity and crude availability to meet this demand. After 2006, pressure will increase on spreads to narrow, though they will likely remain sufficiently wide to encourage ongoing investment in conversion capacity. The primary market forces acting on longer-term light-heavy spreads include
- a deceleration of the current strong rate of demand growth.
- additions of complex refining capacity as well as construction of other types of processes such as crude upgraders and gas-to-liquids facilities.
- a shift in incremental crude quality toward lighter liquids out to 2010.
