Different grades of oil
Like no two people are the same, oil comes in different qualities and grades. Because of this, oil must be refined first to make different products such as gasoline, kerosene, distillate fuel, propane, and propylene. Different grades of oil will yield different amounts of these products. So, to make sure they supply adequate quantities of product oil, and to refine crude oil suitable for their plants, refiners sometimes blend different grades of oil.
Falling light-grade crude
The API is a measure of crude oil density—the lower the figure, the heavier the crude oil. As the chart above shows, imports of crude grades with API (American Petroleum Institute) of 35.0% and lower have been relatively strong over for the last three years. By the end of 2013, imports of crude grade with API higher than 40.1% stood at zero. While medium and heavier crude imports have fallen a bit from 2011, these can also be affected by suppliers’ output, and U.S.’s overall oil consumption (as we’ll discuss in the next part of this series).
As a percentage of total crude imports, medium and heavier grades have taken market share from lighter crude over the past few years, which is attributed to growing domestic production of light crude. For example, the Bakken crude that’s produced in North Dakota generally has low sulfur content (0.17% to 0.20%) and high API gravity of 40% to 42%.
Demand for heavy crude is high
Higher-grade crude yields larger volumes of premium products such as gasoline, but it doesn’t yield as many lower-value products due to chemical differences. So, in order to generate the greatest yield of a combination of final products, refiners will likely continue to blend heavier imported crude with lighter domestic crude.
Plus, in the past, refiners had to spend millions of dollars on equipment that would allow them to produce larger amounts of premium products from heavier and sourer crude. Since it costs capital and time to change current setups to accommodate lighter and sweeter crude, the U.S. may even continue to import heavy crude oil from countries such as Kuwait, Colombia, Venezuela, Brazil, and Saudi Arabia (see the previous article in this series). This case would be positive for the Guggenheim Shipping ETF (SEA) and tanker stocks such as Teekay Tankers Ltd. (TNK), Tsakos Energy Navigation Ltd. (TNP), Nordic American Tanker Ltd. (NAT), and Frontline Ltd. (FRO).