June 26 (Bloomberg) -- Malaysia's Tapis, the most expensive oil benchmark in the world, may appreciate further relative to Brent and West Texas Intermediate crudes because of demand for low-sulfur grades to produce diesel and gasoline in Asia.

Tapis has averaged $5.76 a barrel more than Brent this year, compared with $3.54 in all of 2006. The spread may stay near that level through next year, Commonwealth Bank of Australia analysts Tobin Gorey and David Moore said in a June 14 report.

Demand for Tapis and other low-sulfur, or sweet, grades has increased as countries including Indonesia, Thailand and Vietnam lowered the amount of the pollutant allowed in motor fuels. Tapis is produced off the east coast of Peninsular Malaysia by Exxon Mobil Corp. and Malaysia's state oil company, Petroliam Nasional Bhd.

``Until the refining capacity catches up with the products demanded, that puts a premium on the easier-to-refine grades of crude,'' Gorey said in a telephone interview today. ``This will be with us easily until 2008.''

Tapis, among Asia's premium grades along with Australia's Cossack and Griffin, is valued because it enables refiners to produce a greater amount of gasoline without the increased investments needed to refine crude from the Middle East, which contains a higher proportion of sulfur and other pollutants.

The Tapis field was discovered off the coast of Peninsular Malaysia in 1969 and started production in 1980. Output is about 300,000 barrels a day from platforms in the South China Sea. Exxon Mobil has a 30 percent stake in the area and Petroliam Nasional, or Petronas, holds the rest.

Brent, West Texas

Tapis's premium to Europe's benchmark, Brent, eased to $3.76 a barrel yesterday from an eight-month high of $9.17 on May 29. The premium to U.S. benchmark West Texas Intermediate narrowed to $5.94 yesterday, from a record $14.72 on May 24.

Petronas has set the official selling price for Tapis at $78.06 a barrel for June cargoes, the highest among global benchmarks. The price for immediate delivery rose 0.4 percent to $75.12 a barrel yesterday, according to data compiled by Bloomberg.

Exxon's Malaysian unit said on May 23 that it lost money on each barrel of crude processed at its refinery because the plant uses Tapis crude oil, raising its raw-material costs.

Royal Dutch Shell Plc, in contrast, made $6 on each barrel processed in Malaysia in the first quarter, benefiting from investments in units that give it flexibility to process a greater variety of oil including grades with higher sulfur content than Tapis.

Tapis's widening premium may cut demand for the oil and prompt some refiners to switch grades, said Anthony Nunan, assistant general manager for risk management at Mitsubishi Corp. in Tokyo.

`Most Expensive'

``Benchmark-wise, it's some of the most expensive oil in the world,'' Nunan said in an interview on June 19. ``With prices so high, it makes sense that people would avoid it.''

Tapis, which means refine or process in the Malay language, is considered light, sweet oil with an American Petroleum Institute gravity number of 45.2 degrees. Gravity measures the viscosity or thickness of the crude. The higher the number, the lighter the oil and the more gasoline it typically yields per barrel. Tapis contains 0.0343 percent sulfur by weight.

Australia's Cossack and Griffin grades traded at a discount of 30 cents to Tapis yesterday, according to Bloomberg data.

Demand for these varieties has risen in the past few years because refiners are seeking oil that yields a higher percentage of cleaner-burning products.

Less Sulfur

Indonesia's government in March implemented a stricter emission standard, cutting sulfur content in diesel to 0.35 percent from 0.5 percent. Vietnam this year ordered retailers to conform to a 0.25 percent specification. In 2006, Australia raised the standard to 0.005 percent.

``Obviously, if you start with less sulfur in the crude oil then there's less work to do at the refinery,'' according to the Commonwealth Bank report. ``Anything that makes the refining process quicker and easier is highly prized because the alternative is much-higher cost.''

West Texas, which has historically been more expensive, is currently at a discount to Brent because supplies of the U.S. grade accumulated at a storage point in Cushing, Oklahoma.

Brent closed $2.18 a barrel more than West Texas yesterday, down from an all-time high of $6.54 a barrel on May 24.

Brent crude for August settlement fell as much as $1.16, or 1.6 percent, to $70.20 a barrel on the ICE Futures exchange. The contract traded at $70.28 a barrel at 3:37 p.m. in London.

To contact the reporter on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net.

Last Updated: June 26, 2007 11:05 EDT