Light vs. Heavy & Sweet vs. Sour: Some Intrinsic Characteristics Determining the Value of Oil

Introduction

The oil industry is as complex as it is fascinating. Over 100 million barrels of oil were consumed daily in 2023, illustrating the sector’s preeminent role in satisfying the planet’s energy demands. As of the time of writing, unconventional and conventional petroleum sources are being exploited in 33 different sovereign states, further highlighting the grand international scope of the industry. It is, thus, essential to seek greater insight into this fundamental cornerstone of the global economy. This explanatory aims to ascertain what intrinsic characteristics impact a crude's economic utility and price. It shall accomplish this by: (a) briefly defining the term ‘intrinsic characteristics’; (b) defining and outlining the significance of a crude’s API gravity, and; (c) defining and explaining the significance of sulfur content to specific crudes. The author concedes that in the context of the complexity of the oil industry, this note merely hopes to offer its readers a foundational and introductory understanding of the topics it opts to discuss.

The Meaning of Intrinsic Characteristics:

Before attempting to answer Question (a), it is first necessary to outline what is meant by ‘intrinsic characteristic.’ It is submitted that ‘intrinsic characteristic’ refers to any feature or attribute related to the oil's internal material or chemical composition. This prima facie excludes any discussion regarding how external events, such as the 1973 Arab Oil Embargo or the COVID-19 pandemic, can (and have) profoundly impacted international oil markets. Having clarified the above point, this note can now outline the specific intrinsic characteristics it shall focus on below. There are two key intrinsic characteristics that impact the price and utility of a specific crude, these are: (a) API gravity (or weight), and; (b) amount of sulfur content.

Having briefly explained the meaning of intrinsic characteristics and what they include specifically, this note can proceed to define them and explain their broader significance, beginning with API gravity.

What is API Gravity and Why it is Important?

API gravity refers to the density of petroleum compared to liquid water. In this regard, an API gravity greater than 10 entails that a particular crude is lighter than water (and, consequently, can float above it). In contrast, an API gravity measurement below 10 entails that the oil is heavier and sinks when placed above water. A crude would be considered ‘ultra-light’ if it had an API weight of 44 and above; the API weight of a ‘light’ crude would fall between 44. and 34, while anything between 34 and 24 would be considered a ‘medium’ crude. A ‘heavy’ crude would score from 24 to 14, while a ‘very-heavy’ crude would have an API weight below 14. Examining particular types of heavy and lighter crudes can illuminate what influences API gravity scores. For example, oil extracted from Venezuela’s Faja Tar Belt generally has an API gravity of 8.5 and is considered ‘extra-heavy.’ In contrast, ‘Saharan Blend’ from the Algerian desert is one of the lightest crudes on the market, with an API gravity of 45. The critical difference between these two crudes is the significantly higher presence of foreign impurities, such as heavy metals, nitrogen, sulfur and clay, within Faja Tar Belt oil, which leads to a substantially lower API gravity score and enhanced viscosity.

Figure 1 — The price per-barrel of West Texas Intermediate (WTI) and Western Canadian Select (WCS) contrasted from May 2019 to April 2020 (credit: Canada Action).

What are some notable distinctions between heavy and lighter crudes? One crucial difference relates to price. Lighter crudes, such as Angolan ‘Nemba’ (with an API weight of 38.6) or Guyanese ‘Liza’ (with an API weight of 31.9), are generally perceived as more valuable by vendors and, thus, trade at a premium. The comparatively higher value of light crudes is well-reflected in the consistently lower price (see Figure 1 above) that Western Canadian Select (WCS), which has an API density ranging from 20.5 to 21.5, has traded compared to other benchmark crudes, such as West Texas Intermediate (WTI), which has an API density of 39.6. This trend is further evidenced by the high demand for lighter crudes such as Malaysian ‘Tapis’, which is globally recognised for its exceptionally high API density score of 45 and continues to be traded at some of the highest per-barrel prices in the oil market. The cause of these price differences partially relates to the fact that compared to heavier crudes, refined lighter oils produce a higher percentage of useful, high-value and in-demand refined products, namely gasoline and diesel fuel.

From the perspective of multinational oil companies engaged with upstream activities, lighter oils have unique benefits. This is because they require cheaper and simpler ‘conventional’ extraction methods due to being less viscous, whereby vertical wells are drilled, and the natural pressure in the oil formation forces the crude to the surface. Heavier oils are generally extracted using more capital-intensive methods, which require the construction of extensive infrastructure systems. One such method is Steam Assisted Gravity Drainage (SAGD), whereby a pump is drilled to channel steam at high pressure and temperatures to cause the trapped crude to liquefy, thus allowing it to be extracted more efficiently using a secondary pump. This, in turn, makes upstream light oil resources incredibly valuable, as it helps oil multinationals maintain higher profit margins.

Despite the arguably more appealing attributes of lighter crudes, the author does not wish to infer that heavier reserves are somehow ‘less important’ to the global hydrocarbon industry. Heavy crudes cannot be ignored as they comprise 70 per cent of the world’s entire known supply of oil and, therefore, dominate the current oil trade. In this context, it is notable that the weighted average of crude oil exported from OPEC members (which includes major oil exporters such as Venezuela, Kuwait and Saudi Arabia) is heavier than that of WTI and Brent crude. It is, therefore, helpful to conceptualise lighter crudes as an increasingly scarce luxury available to oil multinationals and consumers, with heavy crudes remaining it’s more common yet (so long as hydrocarbon products remain widely consumed) indispensable cousin.

What is the Relevance of Sulfur Content to Oil?

It was established above that oil can contain numerous material impurities, including sulfur.

[Work In Progress].

Conclusion

[Work In Progress].