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Refiners May Face Challenges Due to Lighter Permian Crude

by Krystal

As producers in the Permian Basin deplete their best tier-one drilling sites, they are increasingly turning to second-tier locations. This shift often results in lighter crude oil than the typical WTI Midland grades.

U.S. light crude is gaining popularity among global customers due to its low sulfur content and refining qualities that are comparable to light grades from the North Sea and Africa. However, recent tests reveal that the gravity of WTI Midland crude ranges from 41 to 44 degrees, according to anonymous sources who spoke to Reuters. This range meets Platts WTI Midland specifications, which allow for a sulfur content of 0.2% or less and gravity between 40 degrees and 44 degrees API.

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As the Permian crude becomes lighter, with higher API gravity numbers, it risks falling into the super light category. This change could alter how refineries process this crude, as noted in a Reuters analysis.

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Refiners may need to blend super light crude with heavier grades to produce essential fuels like gasoline, diesel, and jet fuel. Alternatively, they may face the costly task of upgrading their refineries to handle super light crudes.

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According to RBN Energy, WTI crude has an API gravity between 38 and 44 degrees, primarily found in the Midland and southern Delaware basins. However, the variation in Permian crude quality is significant, with differences occurring from one area to another.

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The trend toward lighter WTI Midland crude may impact not just demand from refiners, but also the pricing of the Brent crude benchmark. WTI Midland is now included in the Platts assessment of Dated Brent, which is a crucial component of the Brent benchmark.

Since the U.S. lifted restrictions on crude oil exports in 2015, the construction of pipelines in Texas and Louisiana has allowed for increased exports. This surge has made WTI a more prominent benchmark in oil markets. Last year, WTI Midland was incorporated into the Dated Brent assessment.

According to RBN Energy analyst Robert Auers, a lighter WTI Midland crude may reduce the benchmark’s value. He estimates that if the trend continues, it could lower the Dated Brent price by $0.50 per barrel.

Industry stakeholders, including refiners and pipeline operators, are discussing the need for a new benchmark for lighter grades to distinguish WTI Midland from super light crudes. As production in the Permian continues to rise, crude oil is likely to become lighter, especially as drillers explore lower-quality sites with more associated natural gas.

The U.S. Energy Information Administration (EIA) projects in its October Short-Term Energy Outlook (STEO) that Permian oil production will keep increasing, driven by improvements in well productivity. The recent launch of the Matterhorn Express pipeline will also help ease capacity constraints for associated natural gas, enabling more crude oil production.

The Permian Basin, the largest oil-producing region in the U.S., is expected to see steady growth, although at a slower pace. A July report from Goldman Sachs Research indicates that while technological advancements will continue to boost production, the basin’s aging geology may negatively impact crude oil output in the future. Goldman predicts that Permian crude production growth will slow to 6% this year and drop to 4% by 2026.

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