Thursday, June 19, 2008 0 comments ++[ CLICK TO COMMENT ]++

A Quick Look at Sweet Light Crude vs Sour Crude Spread

A poster on the gurufocus.com forum, DaveinHackensack, quoted a hypothesis of a poster by the name of MathAnalyst on the Yahoo message board. The author's guess was that the steep run-up in oil prices since 2006 was due to government regulations implemented in 2006 that altered the sulfur content. His/her guess was that this caused the increase in sweet light crude oil. The answer seems to be that the hypothesis is incorrect. Here is the original post, followed by my quick look into this:

MathAnalyst: So, why have crude oil prices risen so sharply since early CY-2006 - - - even faster than the rate of increase starting in CY-2001? Here’s my answer - - - which you won’t hear on CNBC, Bloomberg, Bill O’reilly or the Halls of Congress:

In CY-2006 the Federal EPA began to require the use of Ultra Low Sulfur Diesel (ULSD) having less than 15 ppm sulfur. To achieve this stringent requirement, the demand by refiners for light-sweet (low sulfur) crude oil began to rise, while the demand for the heavier-sour grades of crude oil began to fall. During this period, the total amount of crude oil being consumed in the US remained nearly unchanged, but balance between light-sweet crude oil and heavy-sour crude oil changed. The amount of ULSD produced in the US since Mar-2006 has risen by 2.9M BPD, or a factor 25. The net result being that the price of WTI began to rise on increased demand pressures. Furthermore, supplies of light-sweet crude oil are falling at about 7%/year - - - this also puts more upward pressure on prices. Hence, in my opinion, the rise in the price of WTI crude oil can be laid at the feet of the Federal Government – and NOT some group of “speculators” in crude oil futures as the Congress would like us to believe.

Of course, this is all just my technical opinion - - - the nice folks at CNBC may have a different take.


One quick way to test this theory is to look at the spread between the sour crude and light crude. If the sweet light crude with the lower sulfur was in higher demand, its price would have gone up much more than that of the sour crude. There are many types of oil but I looked at the Saudi Arabian crude (light vs heavy) prices availabe from the EIA website. Without being an expert in the crude types, I just picked those since they had a long-term history and, since Saudi Arabia has been the #1 oil producer, their oil prices represent world prices. Now, I have no idea if the Saudi oil is what USA imports (it probably isn't--I think the heavy stuff from there goes to Asia.) But that should not detract from the argument since we are talking about the world oil price anyway. Here is a chart showing the difference in price ($/bbl) and percent difference:



You can tell from the chart that the spread isn't unusual since 2006. Without digging deeper (perhaps into other types of oil), I see no reason to think that government regulations are primarily responsible for the oil price increase (they likely had some impact but it is probably minor.)

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