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28 million barrels of sour crude parked in tankers in the gulf

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Need some refineries to convert to process Sour Crude.

http://www.rightsideadvisors.com/premium/64/default.aspx?article=/tc/tcx/rsambr-energy/20080519_024649_msg.html

Shortage Or Plenty?
May 19, 2008
Jim Brown

OPEC claims there is plenty of oil in the system and yet there is not enough to go around. Why is that so? I have explained this many times in the past but not for several months. All oil is not equal. There is light sweet crude with very little sulfur that is easily refined into gasoline. There is heavy sour crude that flows slowly and has very high sulfur levels. Only a few refineries can refine this grade into gasoline because of the extra and expensive processes necessary to remove the sulfur before it becomes gasoline or diesel. There is also a variety of grades in between. A single refinery is built to process a specific kind of oil. If it is setup to refine light sweet crude then it cannot refiner heavy sour because the processes are different. That is a simple explanation but there are dozens of variants. Suffice to say that a refinery can only process certain grades of crude and no others. This is the equivalent of you pulling into a filling station for regular unleaded and all they have is diesel. You can't use it even if it was selling for 10 cents per gallon. If you don't have gasoline you can't drive. Period.

There is plenty of oil available in the world. Unfortunately there is a shortage of light sweet crude. For instance Iran is drowning in sour crude at present for what was initially thought to be a refinery down for maintenance reasons. There are tankers with more than 28 million barrels of Iranian crude parked in the Persian Gulf waiting for that refinery to restart. It turns out that may not be the problem but I will get to that later. Iran pumps 4 mbpd and exports 80% of that oil. It is heavy sour crude with few refineries capable of using it. That parked oil has increased from 20 million barrels to 28 million in just the past week. Plenty of oil but no place to go. Some analysts wonder if this excess oil is the result of U.N. sanctions finally taking hold. We found out on Friday that Iran had just contracted for another VLCC tanker from Singapore's Tanker Pacific. Nobody really knows why this oil is just parked in the gulf and costing Iran $56,000 per day per ship to just sit there. (I will pose another scenario later.)

Venezuela's oil is also a heavy crude with very few refineries built to process it. If the U.S. suddenly cut off imports from Venezuela they would be swimming in oil very quickly with nobody to buy it.

When OPEC says there is plenty of oil in the system and they can't find buyers for all of their supplies they are actually telling the truth. They are just not telling the whole truth. There is a surplus of sour crude and a shortage of sweet crude. When you see us talk about the price of oil that is the price of sweet crude, which is the benchmark for oil prices. Everything else is priced at a discount to light sweet crude. OPEC has complained for years that there is not enough refining capacity around the world to take advantage of all the crude available. They are completely correct. If there were a dozen more refineries capable of processing sour crude then there would be no oil shortage today. In a couple years definitely but not today.

Iran musings: Iran now has 28 million barrels of crude parked in the Persian Gulf. Why? Here is where the plot thickens. You may remember Iran threatened to cut production last week and that sent oil prices soaring before the claim was softened. Is Iran just waiting for oil prices to go higher to get a better price for their oil? Was the production cut rumor a way to jack up prices even higher? Surely they would not take this big of a gamble worth billions of dollars with a plan to bluff prices higher. Absolutely they would! They tried this exact strategy in 2006 and failed. Beginning in March of 2006 Iran started making threats that they were going to cut production while storing 20 million barrels of crude in tankers parked in the gulf. Unfortunately for Iran instead of paying Iran's higher price for crude there was enough oil on the market then for traders to just buy elsewhere. Iran's bluff did not work and they ended up selling it at a huge discount to Shell and India's Reliance. It appears Mahmoud Ahmadinejad is so desperate for money to keep his regime alive that he is trying the same trick and with Saudi willing to pump more of a higher quality oil it appears Iran is going to lose money again. Iran is in economic trouble with 45% of the population kept inline only by heavy subsidies and military force. The other 55% are ethnic Persians. Iran is extremely vulnerable right now. If the U.S. was able to pressure Iran's primary oil buyers (Japan, China, South Korea and Italy) to look elsewhere for another month or so then Iran would really be in trouble and the regime could fail. 80% of Iran's revenues come from oil and for whatever reason it is not selling. Now might be the time to tighten the noose.

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