Sour vs. Sweet Crude

Here is an interesting excerpt from a recent Forbes Article. This is the best summary I've seen yet of the refinery issues as it relates to sour vs. sweet crude. It's clear that GHM's products will be in huge demand for many years.

"A big reason why Valero has been so profitable is because it is one of the largest refiners of heavy “sour” crude. Valero decided long ago to go after this segment of the market, and it has turned out to be a brilliant strategy. Why? Because there is a widening price gap between heavy “sour” crude and light “sweet” crude. The price gap has ranged between $9 and $20 this year and is currently over $15 per barrel. Last year the price gap averaged around $11, and in 2003, it was only $7.

Refiners churn out the same end products (gasoline, heating oil, distillates, etc.) using either feedstock, but not all refiners have the equipment to process heavy sour crude. That costs a little more (it costs Valero only $1.5 to $2 more for refining sour versus sweet), but those that can are cashing in on the price difference and their stock prices reflect that.

The price gap is widening because there is a big supply/demand imbalance. The vast majority of the world’s oil reserves (75%) are sour crude. Only 25% is sweet, but most of the current oil production (40%) and most of the world’s refineries are geared to sweet. In China, where much of the growth in oil demand is generated, 80% of refining capacity is dedicated to sweet crude. When OPEC turned on 2 million barrels a day of excess production, the world’s refiners turned their noses up because it was largely sour crude.


The big shortage is of sweet crude--that’s where demand is growing, and that’s the price of oil we see announced. In fact, OPEC recently announced that worldwide production of sweet crude may have peaked and is now on the decline. Meanwhile, the world is awash in supply of sour crude without many refiners able to process it. It will take a long time for refining capacity to change.

So, with growing demand for gasoline and other refined-oil products driving the prices and profits for all refiners upward, and with companies like Valero reaping the rewards of a widening price gap between sour and sweet on the upstream side, sour refiners like Valero are going to continue their monster returns.

Energy demand isn’t going away, so the largest portion of your portfolio should be in energy stocks. Take my advice and fill up on some cheap energy stocks while their prices fall back. "

You can access the full article at: http://www.forbes.com/home/investmentnewsletters/2005/10/14/chevron-conoco-valero-tesoro-cz_kk_1013soapbox_inl.html