Saudi to cut heavy crude output under OPEC deal: BofAML

Top OPEC exporter Saudi Arabia is likely to cut production of heavy crude grades as part of its pledge to restrict output under the producer group’s agreement last year, Bank of America Merrill Lynch said in a report on Sunday.

A surge in OPEC output has increased the availability of medium to heavy crude grades, the report said, noting that crude oil light-heavy spreads have widened over the past couple of years following Saudi Arabia’s decision to engage in a market share war with the US shale industry.

US shale producers lost 990,000 barrels per day (bpd) of production between Q2 2015 and Q4 2016, suggesting that the global crude slate turned more heavy throughout that period.

However, OPEC’s agreement to cut oil production to a combined 32.5 million barrels per day (mbd) last November, combined with a pledge by non-member nations to restrict output, will pave the way for “another shift in global crude oil gravity,” BofAML said.

Saudi Arabia, a producer of medium to heavy crude oil, will account for 40 percent of the pledged cut, reducing output from 10.63 mbd in November 2016 to 10.05 mbd by Q2 2017.

The kingdom has already trimmed its oil production to below 10 million barrels per day (mbd), its lowest level in almost two years, Reuters reported on Thursday, citing the kingdom’s energy minister Khalid Al-Falih at a conference in Abu Dhabi.

 “The key question is whether Saudi will cut output evenly among its three main crude grades or favor some over others. The historical pattern to sell more profitable (light) grades should be even more pronounced this time around as the kingdom needs to maximize revenues in this low price environment,” the lender added.

Growing light crude oil supplies, combined with fewer medium to heavy barrels, will lead to a narrowing in light-heavy crude spreads around the globe.

In fact, the Brent-Dubai spread has already narrowed since Q2 2016 on strong demand for Middle Eastern crudes from Asian refiners, the lender added.

Given the narrowing light-heavy spreads and a potential tax reform on imports and exports from the Trump administration, US refiners may be encouraged to import less crude, process a lighter crude slate and export more gasoline to meet growing emerging market demand, the report noted.