For the past two years, light-heavy crude spreads have blown out. Crude oil light-heavy spreads have widened over the past couple of years following Saudi’s decision to engage in a market share war with the US shale industry.
Surging OPEC output has increased the availability of medium to heavy crude grades while US light-sweet production was forced to shut down on unsustainable economics. In the US, heavy barrel prices as a proportion of light collapsed, especially compared with 2011-14 (figure 1). This has been intensified by higher heavy grade output from Canada and Brazil, where some investments made in the $100/barrel oil environment came into production only recently (figure 2).
For OPEC and to a lesser extent Russia, the past couple of years have been all about increasing output hence market share. From Q2 2014 to Q4 2016, combined OPEC and Russia oil output increased by 3.8mn bpd or 8%, forcing non-OPEC output to move from record-high year-on-year growth into significant declines (figure 3). Most of the downturn has come from US shale oil, one of the lightest crude grades being produced worldwide at the moment. As per BoA Merill Lynch estimates, the US shale oil industry lost 990,000 bpd of production between Q2 2015 and Q4 2016, suggesting that the global crude slate turned more heavy throughout that period (figure 4).
Now the tables are turning after the OPEC/non-OPEC deal. According to reports, OPEC nations in December already started to dial down crude output from record levels of 34.2mn bpd in November, driven mainly by pipeline disruptions and strikes in Nigeria (figure 5). Looking forward, Saudi Arabia, a producer of medium to heavy crude oil, should account for 40% of the pledged cut, reducing output from 10.63mn bpd in November to 10.05mn bpd by Q2 2017 (figure 6).
