Refineries May be Unwilling to Pay up

Expanding U.S. production of light crudes from shale formations in North Dakota and Texas may strain the processing capabilities of refineries at the Gulf of Mexico, pressuring prices for these grades in the nation's largest fuel-making region, the Energy Information Administration said in its This Week in Petroleum Report.

The average density of crude imported to the Gulf Coast, as measured by American Petroleum Institute gravity readings, has fallen to the lowest levels since at least 1999, according to EIA data (the higher the API gravity, the lighter the crude oil). The decline reflects rising volume of domestic light crudes - including oil from the Cushing, Oklahoma, storage facilities shipped via the Seaway pipeline - displacing imports from Africa.

Pipeline expansions are expected to result in even more light crude at the Gulf Coast in coming years, a potentially problematic situation for refiners, who would need to adjust processing streams and revamp equipment, which may adversely affect their operations.

Light crudes contain lower sulfur and are easier to process, and therefore are typically priced at a premium to heavier grades. However, adjusting operations to handle more light oil "carries a cost and, as a result, refiners may not be willing to pay as much for light crude (compared to heavy crude), and light crude prices could decline," the EIA said.

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