Oil is not all the same
Investors must also realize that crude oil found at different locations is not all the same. The two main characteristics used to describe oil are density and sulfur content. Crude oil with less sulfur is considered “sweeter,” while crude with more sulfur is tagged “sourer.” This is pretty important because different refining specifications are required to process oil with different densities and sulfur contents.
The U.S. produces high-quality oil
Much of the shale oil produced in the United States is of high quality. These oils are sweet and some of the lightest in the world. Oil found in the North Sea (Brent), Libya, Nigeria, Malaysia, and Algeria is among the sweetest in the world. On the other end, Mexico, Kuwait, and UAE have lower-quality crude.
Refining capacity is important
Because refineries must be altered to refine different qualities of crude, this doesn’t mean that the U.S. can replace all of its heavy crude oil imports with domestic crude that’s lighter and sweeter. To do that, refiners must adjust their machinery or add more capacity to refine lighter and sweeter crude.
If U.S. domestic refiners are out of capacity to refine sweet crude, then this could support foreign oil imports. So U.S. refining capacity for sweet crude is another factor that affects demand for tankers. Excess or additional capacity for refining high-quality crude bodes poorly for crude tankers, but if there’s no more capacity to refine high-quality fuel, U.S. oil imports will be supported. Investors shouldn’t take refining capacity additions as a simple black and white. If more refining plants are added to countries like China , they could point to higher demand for tankers in the near future if they benefit oil imports.
Information on refining capacity by oil quality mix is harder to come by. But investors could get a sense of refining capacity walls by looking at changes in different oil price benchmarks (like the WTI-Brent spread or LLS-Brent differential) and in the quality of oil being imported by different countries. Countries like Algeria and Nigeria hold some of the highest-quality oil in the world. Another way to see how refining capacity could be limited is by following U.S. oil imports from specific countries that generally produce the kind of oil quality.