Stronger demand and tighter supply of sour barrels along the US Gulf Coast has boosted values for Gulf of Mexico grades in recent months – flipping the traditional sweet/sour spread.
The spread between medium sour Mars crude, and light sweet West Texas Intermediate at the Magellan East Houston terminal has narrowed significantly during the second quarter of 2020 and the start of the third quarter, with Mars on pace to average a premium to WTI MEH for the first quarter since S&P Global Platts began assessing both grades in early 2015.
While WTI MEH has averaged an 80 cents/b premium to Mars crude year-to-date in 2020, just 23 cents/b narrower than the spread during the same time period of 2019, differentials for Mars crude have been relatively strong in recent months.
In the second quarter of 2020, during the height of coronavirus-induced lockdowns among Western countries, WTI MEH averaged a 10 cents/b premium to Mars crude, down from a $2.25/b premium during the previous quarter. Indeed, Q2 saw the narrowest spread between the two grades since the Q1 2019, when sour crudes strengthened globally following the sanctions on Venezuela’s oil industry and a continuation of OPEC+ production cuts.
Moreover, August 2020 was the strongest month on record for Mars crude relative to WTI MEH, with WTI MEH averaging a 58 cents/b discount to Mars.
Previously, July 2019 saw Mars crude at its strongest average premium to WTI MEH at 25 cents/b, following interruption in offshore production due to Hurricanes and other storms, as well as disruptions in the global supply of sours stemming from sanctions on Iran’s and Venezuela’s oil exports, and continued OPEC+ supply cuts.
Should the trend in Q3 2020 continue, Mars values will average a premium to WTI MEH for the first time since February 2015 when both grades were first assessed by Platts. Currently, through the first two-thirds of Q3 2020, Mars has averaged around a 30 cents/b premium to WTI MEH.
In a sign of higher demand for sour crudes compared to sweet crudes, Shell Midstream said in its second quarter earnings call that Mars pipeline volumes fell just 7% in the second quarter, compared to a 20% fall in Zydeco pipeline volumes, which carries light sweet shale crude from Houston to Louisiana.
The collapse in oil demand due to the coronavirus pandemic has disproportionately hurt shale plays in the US while the deepwater production, which in the Gulf of Mexico tends to yield more medium sour crudes, has been more resilient, said Shell Midstream CEO Kevin Nichols in a July 31 earnings call. The medium sour barrels, Nichols said, remained in demand from Gulf Coast refiners and global customers. In July, exports of Mars crude hit an all time high of 273,000 b/d, according to data from Kpler, up from the previous record of 219,000 b/d set just the month prior.
Shell expects to expand the Mars crude pipeline system, which can already carry around 600,000 b/d of crude, by 65,000 b/d in 2021.
Strong demand for sours compared to sweets has not only been observed in the USGC, with European traders noting to Platts on August 26 that margins for European sour crudes have remained better than margins for light sweet grades, however, overall demand in the region has been lackluster, keeping margins generally thin.