Recently there have been discussions of a possible change in the specifications of the NYMEX light sweet oil contracts. Currently, these contracts only focus on API gravity, sulfur content, pour point, viscosity and vapor pressure. Proposed new changes to the NYMEX light crude specifications could soon contain a micro-carbon residue limit of 2.4% or less by weight, total acid number (NYSEARCA:TAN) of 0.28 mg KOH/g or less, nickel content of 8ppm or less, vanadium content of 15ppm or less and high temperature simulated distillation yield of 50% between 470 and 570 F. What is happening in the industry that would cause such changes and why are they important to you?
It is not difficult to see the hundreds and thousands of news pieces talking about oil sands (Canadian oil sands), shale oil (think North Dakota's Bakken formation), and tight oil these days. In recent years, these oil developments have become very popular. But it is becoming more and more apparent that these oil blends are, in certain cases, heavier than the current standards for WTI light sweet crude oil. These heavier oil blends contain more of the undesirable components described in the possible new specifications.
Previously, light sweet blends were a mixture of slightly off-spec grades that could be combined to make a much more desirable crude oil blend. But these days it is becoming more common for heavier oil blends from new unconventional sources to be blended to make a more profitable refinery feedstock. Heavier oils are becoming more frequent at critical areas such as Cushing, OK and are being passed all the way through to the market as railroads and pipelines continue to deliver more heavier oil products to the refinery hubs along the East and Gulf Coasts.
Possible effects that could occur in the near future include the decreased profitability of tight oil development, such as Canadian oil sands, and development for tight or shale oil, such as North Dakota's Bakken. There is a possibility that development of these heavier crude oil resources could slow down as there could be diminished profits from these heavier crude oils. These costs would most likely be passed along to the consumer.
Other possible changes could be seen in companies that specialize in refining. There could be increased profits as refiners may be able to increase profit margins by switching to cheaper input feedstock: namely, the heavy oils now blended into WTI that would become off-spec.
Lastly, the price spread between light sweet WTI (U.S.) and Brent (Europe) could become even smaller than anticipated as the price of WTI could increase. This spread has been widely assumed to decrease between WTI and Brent as railroad activity has been increasing in the United States to bring heavier crudes to the East Coast and Gulf Coast refining hubs. That transportation trend began due to the lack of pipeline development from areas, such as the Dakotas.
Many other unexpected developments could spin-off of from these spec changes that could also affect market trading in the months ahead. It would be interesting to see if overseas specs also incorporate similar upgrades to their specifications. If not, overseas trading could become even more prevalent.