Photographer: Kuni Takahashi/Bloomberg

Costliest Crudes Get a Lift as Cars Crowd Beijing and Mumbai

  • Light oils seen rising versus heavy grades on gasoline demand
  • Car sales jump in China, India; U.S. summer to lift fuel use

The world’s costliest types of oil are keeping their premium status thanks to the aspirations of the middle class in China and India as well as America’s love of road trips.

QuickTake Oil Prices

Prices of cleaner, less-sulfurous, light crudes that yield more gasoline are set to rise relative to thicker, dirtier and cheaper heavy varieties, Barclays Plc says, as refiners churn out more of the fuel to power vehicles. A government tax cut is helping put more Toyotas and Fords in the hands of Chinese consumers, Indian auto sales are booming in an economy growing faster than any other major competitor, and Americans are looking forward to driving in summer.

While a global glut has prompted the biggest crash in benchmark prices in a generation, producers are betting that auto-fuel demand will help keep their premium crude coveted by refiners. Saudi Arabia raised pricing for all May sales to the U.S. before the start of the driving season, while China is planning to buy more of its Arab Light grade. Lighter, sweeter oils yield about 32 percent gasoline compared with 15 percent for the heavier types, according to BMI Research.

“Higher gasoline demand means higher refining profits and that means more of a premium for lighter and sweeter crudes,” said H. Kumar, managing director of Mangalore Refinery and Petrochemicals Ltd., an Indian processor. “Every refiner would try to maximize gasoline output now by buying the right type of crude.”

Light Shift

China’s Unipec is planning to import more Saudi Light crude this year, shifting away from heavy grades as processors produce more gasoline, according to Wang Pei, an analyst at the oil-trading unit of the Asian nation’s biggest refiner.

The increased demand for gasoline is positive for West Africa, where supply is dominated by light, sweet crude, as the region struggles to find buyers for its cargoes amid the global oil glut, BMI Research, a unit of Fitch Group, said in a report on April 14. BMI also expects refineries in Thailand to maximize fuel output in the next two years amid rising car ownership and construction activity.

In the U.S., gasoline demand this summer will increase 1.4 percent from last year to a record, the Energy Information Administration estimates. Consumption of the fuel typically rises between the Memorial Day holiday in late May and Labor Day in early September, when Americans traditionally take vacations.

Summer Driving

As the summer months approach, profits from refining lighter, gasoline-rich crudes will improve relative to processing heavier crudes that yield more diesel, for which demand is slowing, Barclays analysts including Miswin Mahesh said in a note dated April 18.

Domestic supply of light crudes is shrinking in the U.S. while availability of bitumen from Canada will help offset decreases in heavy oil output, according to Barclays. That means the spread between lighter West Texas Intermediate crude and the heavier Western Canadian Select grade will widen, the bank said.

In Asia, living standards are improving, putting more money in the hands of the middle class in nations where owning a car is seen as a status symbol. Rising wages allowed Indians to purchase a record 24 million new vehicles in 2015.

The China Association of Automobile Manufacturers predicts sales will gain about 6 percent this year, faster than the 4.7 percent pace in 2015. The International Energy Agency predicts the nation’s gasoline consumption will probably jump 6.8 percent a year in the 2015-2021 period, with its vehicle fleet expanding almost 10 percent annually.

“Gasoline is king, one of the most profitable products of the mix,” said John Driscoll, chief strategist at JTD Energy Services Pte, who has spent more than 30 years trading crude and petroleum in Singapore. “Refineries are adapting to this situation with their crude buying and maximizing their yields.”

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