Changing crude quality mix impacts investment decisions; Bayer requests more time for Monsanto deal; ACC Chemical Activity Barometer steady in September

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As price differences between certain crude oils narrow, refinery operation and investment decisions are changing.

EIA: crude oil price differentials and refining decisions impacted by changing quality mix

Growth in global liquid fuels supply since March 2017 has been driven by increases in the production of historically higher-priced light crude oils. This growth has more than offset recent declines in the production of medium and heavy crude oils.

As these production trends continue, price differences between certain crude oils are narrowing, and refinery operation decisions are changing, according to the U.S. Energy Information Administration (EIA).

In 2017, the price differential between medium and heavy crude oil and light crude oil has gotten smaller, reducing the competitive advantage of some more complex refineries.

Image: U.S. Energy Information Administration

On the U.S. Gulf Coast, the premium for Louisiana Light Sweet (LLS) crude oil over heavy Maya crude oil from Mexico narrowed from $9/barrel in March to $5/barrel in August. In the Midwest, the premium for light crude West Texas Intermediate (WTI) over heavy Western Canada Select (WCS) also narrowed from $13/barrel in March to $10/barrel in August.

Differences in sulfur content also affect the price of crude oil and where it can be processed. Sour crude oil requires more complex refinery processing to meet low-sulfur fuel specifications and to avoid damage to refinery units.

Processing heavy-sour crude oil requires additional refinery units—including crackers, cokers, and hydrotreaters—to yield light products. These additional units increase refinery complexity but also allow the refiner more flexibility to select types of crude oils to purchase and run through their refineries, potentially increasing profitability.

Refiners’ investment decisions often depend on the location of the refinery because of the cost of transporting oil. Gulf Coast refineries in the U.S. are typically supplied with heavy Mexican and South American crude oils. Gulf Coast refineries are more complex than East Coast refineries, which are supplied with lighter, sweeter Atlantic Basin crude oils.

Because the price of crude oil and refinery complexity are major factors that affect profitability, a wider price differential between heavy and medium crude oils and light crude oils benefits more complex refineries.

Source: EIA

Bayer requests more time for Monsanto deal

Bayer said it was now likely to be 2018 before it can complete its $66 billion deal to acquire U.S. group Monsanto, later than previously expected.

The European Commission gave the prosed takeover a deadline of January 8, but Bayer said in a statement it had asked the regulator for an extension on the investigation to January 22.

The Commission last month started an in-depth investigation of the takeover, saying it was worried about competition in various pesticide and seeds markets, according to Reuters.

One product of concern, Monsanto’s weed killer glyphosate, or Roundup, competes with Bayer’s glufosinate; vegetable and canola seeds; and licensing of cotton-seed technology to peers.

ACC: chemical barometer holds steady; storms may cause revision

The Chemical Activity Barometer, a leading economic indicator created by the American Chemistry Council (ACC), remained virtually unchanged in September despite the effects of unprecedented Hurricanes Harvey and Irma.


Chart: American Chemistry Council

Though future revisions are likely, the barometer slipped just 0.04 % in September, following a 0.03% decline in August.

Compared to a year earlier, the CAB is up 2.8 percent year-over-year, a marked pullback from recent year-over-year gains. All data is measured on a three-month moving average (3MMA) basis.

On a year-over-year basis, the unadjusted CAB is up 2.3%, also an easing from the previous six months.

Production-related indicators were soft in September, largely due to interruptions related to Hurricane Harvey. At the same time, equity prices gained, input and product prices surged, and inventory remained positive.