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Loss of middle-distillate rich crudes exacerbates global diesel shortage
February 20, 2012
Worldwide Refining Business Digest Weekly.e

Outages in Libyan and North Sea production led to rising prices last year and the loss of Sudanese crude this year coupled with continuing problems in the North Sea is having a similar effect. While Sudan and the North Sea account for only a small amount of global crude loss (350K b/d), the ability of these crudes to be refined into large amounts of middle distillates is having a profound effect. For example, the Nile Blend from South Sudan yields good amounts of kerosene (9%), gas oil (18%), and residues (62%) and only a small amount of naphtha (10%). While kerosene and gas oil directly contribute to the middle distillate pool, the residues can be upgraded in complex refineries using various technologies (i.e., cokers, FCC) to yield more middle distillates. The supply interruptions from Sudan have sent Asian crude buyers scouring for distillate-rich crude replacements, as almost all of Sudan's exports are sent to Asia.

The continuing trend of dieselization worldwide coupled with refineries producing too much gasoline and not enough diesel have left crude prices vulnerable to spike when middle-distillate rich crudes are lost. Diesel demand is expected to increase from tighter restrictions on the sulfur content in ship fuel. On Jan. 1, the International Maritime Organization mandated 3.5% as the maximum sulfur content in the majority of marine bunker fuels, which was lowered from the maximum of 4.5%. Refiners that had traditionally used the bunker fuel as a way to dump high-sulfur oil streams will feel more pressure as a result of the new specifications, while supplies of on-specification product will be tight.

Starting in Aug., ships traveling by coastal North American waters will have a maximum sulfur content specification of 1%. In order to meet the current specs, bunker fuels are blended with low-sulfur fuel oil. However, with tighter sulfur requirements and the closure of refineries on the US East Coast, Reuters' analyst Robert Campbell believes the demand for low-sulfur fuel oil will increase, and as a result boost prices worldwide. As blending becomes more costly and difficult, bunker suppliers will be forced to substitute low-sulfur fuel oil with diesel to meet the fuel requirements.