As the Strait of Hormuz has been effectively blockaded, blocking exports of Middle Eastern crude, a shortage of heavy crude is unfolding. With exports of Russian crude, another major producer of heavy grades, cut off by the war with Ukraine, importing crude from Canada is being discussed to diversify sources that are concentrated in the Middle East. However, if Korea imports Canadian crude, the increased transport distance is cited as an expense burden.
On the 31st, a refining industry official said, "Not only Korea but even the United States, a crude producer, has refining facilities centered on heavy crude," and added, "As imports of Middle Eastern heavy crude have been blocked, heavy crude prices in the international spot market are rising further."
Crude oil is divided into two types by the American Petroleum Institute (API) API Gravity index: oil with an index of 30 degrees or lower and oil with an index of 30–33 degrees. The API index is the density of crude oil compared with water (API degree 10) at room temperature (15.6 C). The higher the API index, the lower the density and the lighter the crude; the lower the API index, the higher the density and the heavier the crude.
If the API index is 30 degrees or lower, it is classified as heavy crude (Heavy crude, 重質油); if the API index is between 30 and 33 degrees, it is medium crude (Medium crude, 中質油); if the API index is 33 degrees or higher, it is light crude (Light crude, 輕質油).
The higher the API index (the lower the density), the higher the yield of high value-added products such as gasoline and naphtha. If the API index is low, more lower-quality petroleum products such as asphalt are produced.
Looking at sulfur content, another criterion that differentiates crude quality, light crude has low sulfur content. Conversely, heavy crude has high sulfur content. Sulfur corrodes refining equipment and affects the catalysts used, so the lower the sulfur content, the better the crude.
Therefore, in the international market, light crude, which has lower refining expense and can produce better petroleum products, is generally transacted at higher prices than heavy crude.
West Texas Intermediate (WTI), produced in parts of Texas and New Mexico in the United States, has a low sulfur content of 0.24% and an API index between 38 and 40 degrees, making it a light, low-sulfur crude. Brent, produced in the North Sea off the United Kingdom, has a low sulfur content of 0.37% and an API index of 38.3 degrees, also making it a light, low-sulfur crude.
Conversely, Dubai crude produced in the United Arab Emirates has a sulfur content of 1.86% and an API index of 32 degrees, making it a lower-quality medium-grade, high-sulfur crude. Canadian oil sands (API index 10–12 degrees, extra heavy crude, 超重質油) and Russian crude (API index 31–33 degrees, heavy crude, 重質油) are also heavy crude in a broad sense.
Refiners distill crude in refining units to produce petroleum products ranging from gasoline to diesel and jet fuel. The amount of petroleum products that can be produced varies depending on the type of crude fed into the refinery. Light crude allows for higher gasoline production and has lower sulfur content, so refining expense is lower. In contrast, heavy crude has less gasoline fraction and higher sulfur content, resulting in lower refining efficiency.
That is why the price of Dubai crude, a heavy crude benchmark, is cheaper than Brent, a light crude benchmark. On Feb. 27, the day before the U.S. and Israel carried out airstrikes on Iran, Dubai crude was $71.24 per Barrel, transacting at a lower price than Brent ($72.48).
But prices for Dubai and Brent reversed after the strikes on Iran. On March 6, after the strikes, when Brent and WTI were transacting at $92.69 and $90.9 per Barrel, respectively, Dubai crude alone broke through $100, trading at $100.42.
Brent has also been transacting above $100 per Barrel since March 12, but Dubai crude reached $169.75 per Barrel (on March 23), widening the gap between the two and deepening the price inversion.
This is due to the fact that refining facilities worldwide are organized around heavy crude. Korea has mainly imported crude from the Middle East because of geographic proximity and lower prices, and optimized its refining facilities for processing Middle Eastern heavy crude. The goal was to import inexpensive Middle Eastern heavy crude and export high value-added products.
A refining industry official said, "We have to compete on unit costs, so the business structure was built to use heavy crude to achieve economic viability," and added, "While we can blend heavy and light crude in refining units, the very fact that supplies of Middle Eastern heavy crude are blocked is the problem."
Even the United States, the world's No. 1 crude producer, has refining facilities centered on heavy crude. U.S. refining capacity can handle about 18 million Barrels, and more than 70% of that capacity uses heavy crude. Although it is a producer of shale oil, an extra light crude, its structure requires a lot of heavy crude.
The United States has so far mainly imported heavy crude from Canada. Of the roughly 5 million Barrels of crude Canada produces per day, more than 3 million Barrels of the roughly 4 million Barrels it exports are heavy crude.
Shin Hyun-don, a professor in the Department of Energy Resources at Inha University, said, "The reason the United States had its eye on Venezuela was heavy crude," and added, "If the United States imports Venezuelan heavy crude, Canadian heavy crude will be left over. With the Middle East blocked, we may have to target that."
The problem is the increased shipping distance and the resulting expense issue. A refining industry official said, "Canada has built infrastructure from production areas toward the Pacific to export to Asia, but volumes are limited," and added, "Heavy crude also comes in from Australia and Africa, but ultimately the expense issue is hard to solve. That is why hopes rest on bringing in Russian heavy crude and resolving the Middle East situation."