Sour crude in West Texas is on track to price above sweet every day this month, the first time that’s happened in 25 years, as Gulf Coast refiners use new pipelines to bring in high-sulfur crude to balance the growing abundance of low-sulfur oil from shale formations.
The sour premium underscores shifting energy needs in the U.S. as techniques such as directional drilling and hydraulic fracturing in Texas’s Eagle Ford and other shale formations have pushed U.S. oil production to the highest level since 1992. This new output is light and low in sulfur, while U.S. Gulf Coast refineries are set up to process heavy, sour crude.
“The strength in the sour grades is largely to do with the growing supplies of light crudes in the Gulf Coast, especially as incremental Eagle Ford production gets lighter,” said Amrita Sen, chief oil market strategist at Energy Aspects Ltd., a research company in London. “The bid for sour crudes is likely to remain strong given that the cokers in the Gulf Coast are starved of sour crudes.”
West Texas Sour priced in Midland, Texas, remained unchanged at a 25-cent premium to West Texas Intermediate oil priced in the same city at 12:18 p.m. East Coast time, according to data compiled by Bloomberg. The premium has ranged from 5 cents to 30 cents this month.
WTS, a medium density, high-sulfur or “sour” crude, averaged a discount of $1.67 to light, sweet WTI in Midland over the past five years. Sour crude requires more processing to remove the extra sulfur while it’s being converted into transportation fuels.
The sour premium has also developed as pipelines begin to bring oil from West Texas’s Permian Basin directly to the Gulf Coast, where the heavy, sour refineries are located.
Magellan Midstream Partners LP’s Longhorn pipeline will transport an average of 90,000 barrels a day to the Houston area in the second quarter. Sunoco Logistics Partners LP’s West Texas Gulf system is moving 40,000 barrels a day to the Houston area, and its Permian Express is expected to begin transporting crude soon.
“It has to do with the pipelines enabling the crude to get to the Gulf Coast,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston.